Project 2: Review of Merchandising Cycle [The following information applies to t

Question

Project 2: Review of Merchandising Cycle

[The following information applies to the questions displayed below.]

Wally’s Widget Company (WWC) incorporated near the end of 2011. Operations began in January of 2012. WWC prepares adjusting entries and financial statements at the end of each month. Balances in the accounts at the end of January are as follows:

  Cash $ 20,570 Unearned Revenue (40 units) $ 5,000   
  Accounts Receivable $ 11,600 Accounts Payable (Jan Rent) $ 2,600   
  Allowance for Doubtful Accounts $ (1,550) Notes Payable $ 16,500   
  Inventory (45 units) $ 4,050 Contributed Capital $ 6,300   
Retained Earnings – Feb 1, 2012 $ 4,270   

• WWC establishes a policy that it will sell inventory at $150 per unit.
• In January, WWC received a $5,000 advance for 40 units, as reflected in Unearned Revenue.
• WWC’s February 1 inventory balance consisted of 45 units at a total cost of $4,050.
• WWC’s note payable accrues interest at a 12% annual rate.
• WWC will use the FIFO inventory method and record COGS on a perpetual basis.

February Transactions
02/01

Included in WWC’s February 1 Accounts Receivable balance is a $1,900 account due from Kit Kat, a WWC customer. Kit Kat is having cash flow problems and cannot pay its balance at this time. WWC arranges with Kit Kat to convert the $1,900 balance to a note, and Kit Kat signs a 6-month note, at 12% annual interest. The principal and all interest will be due and payable to WWC on August 1, 2012.

02/02

WWC paid a $700 insurance premium covering the month of February. The amount paid is recorded directly as an expense.

02/05

An additional 170 units of inventory are purchased on account by WWC for $12,750 – terms 2/15, n30.

02/05

WWC paid Federal Express $340 to have the 170 units of inventory delivered overnight. Delivery occurred on 02/06.

02/10

Sales of 140 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.

02/15

The 40 units that were paid for in advance and recorded in January are delivered to the customer.

02/15

15 units of the inventory that had been sold on 2/10 are returned to WWC. The units are not damaged and can be resold. Therefore, they are returned to inventory. Assume the units returned are from the 2/05 purchase.

02/16 WWC pays the first 2 weeks wages to the employees. The total paid is $2,100.
02/17

Paid in full the amount owed for the 2/05 purchase of inventory. WWC records purchase discounts in the current period rather than as a reduction of inventory costs.

02/18 Wrote off a customer’s account in the amount of $1,650.
02/19

$5,200 of rent for January and February was paid. Because all of the rent will soon expire, the February portion of the payment is charged directly to expense.

02/19

Collected $9,300 of customers’ Accounts Receivable. Of the $9,300, the discount was taken by customers on $7,000 of account balances; therefore WWC received less than $9,300.

02/26

WWC recovered $530 cash from the customer whose account had previously been written off (see 02/18).

02/27

A $600 utility bill for February arrived. It is due on March 15 and will be paid then.

02/28 WWC declared and paid a $750 cash dividend.

Adjusting Entries:

02/29

Record the $2,100 employee salary that is owed but will be paid March 1.

02/29

WWC decides to use the aging method to estimate uncollectible accounts. WWC determines 8% of the ending balance is the appropriate end of February estimate of uncollectible accounts.

02/29 Record February interest expense accrued on the note payable.
02/29 Record one month’s interest earned Kit Kat’s note (see 02/01).

Explanation / Answer

Willey Widget Company General Journal for the moth of February 2011 Date Account Debit Credit 2/1/2011 Note receivable 1900 Accounts receivable 1900 (To record conversion of accounts receivable to note receivable) 2/2/2011 Insurance expense 700 Cash 700 (To record the insurance premium paif for February) 2/5/2011 Inventory 12750 Accounts payable 12750 (To record purchase of 170 units ) Inventory 340 Cash 340 (To record freight paid on purchase of 160 units) 2/10/2011 Accounts receivable 21000 Sales revenue 21000 (To record sales of 140 units from 02/07 to 02/10) Cost of goods sold 11365 Inventory 11365 (To record cost of goods sold for 140 units) 02/15/2011 Unearned revenue 5000 Sales revenue 5000 (To record delivery of 40 units against advance received in January) Cost of goods sold 3080 Inventory 3080 (To record cost of goods for 40units sold @$77 per unit) 02/15/2011 Sales revenue 2250 Accounts receivable 2250 (To record retun of 15 units sold on 02/10) Inventory 1155 Cost of goods sold 1155 (To record cost of the 15 units returned) 02/16/2011 Salaries and Wages expense 2100 Cash 2100 (To record payment of wages for the first two weeks) 02/17/2011 Accounts payable 12750 Cost of goods sold 255 Cash 12495 (To record payment to supplier) 02/18/2011 Bad debt expense 1650 Accounts receivable 1650 (To record write off of customer account) 02/19/2011 Rent expense 2600 Accounts payable 2600 Cash 5200 (To recrd payment of rent for January and February) Cash 9160 Sales discounts 140 Accounts receivable 9300 (To record collection from custmeors) 02/26/2011 Cash 530 Bad debt expense 530 (To record recovery of amount from account written of on 02/18) 02/27/2011 Utility expense 600 Accounts payable 600 (To record utility bill ) 02/28/2011 Dividends 750 Cash 750 (To record cash dividend paid) Willey Widget Company Adjustment Journal for the moth of February 2011 Date Account Debit Credit 02/28/2011 Salaries and Wages expense 2100 Salaries and Wages payable 2100 (To record wages accrued) 02/28/2011 Allowance for doubtful accounts 108 Bad debt expense 108 (To record the wirte back of excess allowance ) 02/28/2011 Interest expense 165 Interest payable 165 (To record interest on note payable fo February @12% p.a.) 02/28/2011 Interest receivable 19 Interest revenue 19 (To record interest earned on note receivable @9% of Kit Kat) Willey Widget Company Closing entries Date Acount Debit Credit 2/29/12 Sales revenue 26000 Interest revenue 19 Sales returns 2250 Sales discounts 140 cost of goods sold 13035 Wages expense 4200 Rent expense 2600 Bad debt expense 1012 Insurance expense 700 Utility expense 600 Interest expense 165 Income summary 1317 (To record closing of revenue and expenses accounts) 2/29/12 Income summary 1317 Retained earnings 1317 (To record the closing of net income to retained earnings0 2/29/12 Retained earnings 750 Dividends 750 (To record closing of dividends paid to retained earnings) Willey Widget Company Trial balance as at 28.02.2011 Opening Transactions Unadjusted Adjustments Adjusted Income statement Balance Sheet Account Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Debit Credit Cash 20570 9160 21585 8145 8145 8145 Accounts receivable 11600 21530 15100 18030 18030 18030 Allowance for doubtful accounts 1550 1550 108 1442 1442 Interest receivable 0 19 19 19 Unearned revenue 5000 5000 0 0 0 Accounts payable 2600 15350 13350 600 600 600 Wages payable 0 2100 2100 2100 Interest payable 0 165 165 165 Inventory 4050 14245 14445 3850 3850 3850 Notes receivable 1900 1900 1900 1900 Notes payable 16500 16500 16500 16500 Common stock 6300 6300 6300 6300 Retained earnings 4270 4270 4270 4837 Dividends 750 750 0 Sales revenue 0 26000 26000 26000 26000 Sales returns and allowances 2250 2250 2250 2250 Interest revenue 0 19 19 19 Sales discount 140 140 140 140 Cost of goods sold 14445 1410 13035 13035 13035 Insurance expense 700 700 700 700 Wages expense 2100 2100 2100 4200 4200 Bad debt expense 1650 530 1120 108 1012 1012 Rent expense 2600 2600 2600 2600 Utility expense 600 600 600 600 Interest expense 0 165 165 165 Net Income 1317 T o t a l 36220 36220 92420 92420 55220 55220 26019 26019 31944 31944 Willey Widget Company Income statement for the moth ending February 28, 2011 Sales Revenue 26000 Less: Sales Returns 2250 Less: Sales discounts 140 -2390 Net sales 23610 Cost of goods sold 13035 Gross margin 10575 Operating expenses Wages expense 4200 Rent expense 2600 Bad debt expense 1012 Insurance expense 700 Utilitiy expense 600 Total operating expenses 9112 Operating income 1463 Non operating items Interest expense 165 Interest income -19 Total non operating expenses 146 Net income before taxes 1317 Willey Widget Company Balance sheet as at February 28, 2011 Assets Cash 8145 Accounts receivable 18030 Less: Allowance for doubtful accounts -1442 16588 Inventory 3850 Note receivable 1900 Interest receivable 19 Total Assets 30502 Liabilities and equity Accounts payable 600 Interest payable 165 Wages payable 2100 Notes payable 16500 Totalliabilities 19365 Common stock 6300 Retained earnings as at 02/01 4270 Net income 1317 5587 Dividends paid -750 Retained earnings as at 02/29 4837 Total stockholders' equity 11137 Total liabilities and equity 30502 Willey Widget Company Statement of retained earnings as at February 28, 2011 Beginning balance as at Feb.1 4270 Add: Net income 1317 5587 Less: Dividends paid -750 Ending balance as at Feb.29 4837

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