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:

Included in WWC’s February 1 Accounts Receivable balance is a $1,400 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 $1,400 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.

WWC paid a $650 insurance premium covering the month of February. The amount paid is recorded directly as an expense.

An additional 180 units of inventory are purchased on account by WWC for $13,500 – terms 2/15, n30.

WWC paid Federal Express $360 to have the 180 units of inventory delivered overnight. Delivery occurred on 02/06.

Sales of 150 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.

The 30 units that were paid for in advance and recorded in January are delivered to the customer.

25 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.

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.

$6,600 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.

Collected $10,000 of customers’ Accounts Receivable. Of the $10,000, the discount was taken by customers on $8,000 of account balances; therefore WWC received less than $10,000.

WWC recovered $600 cash from the customer whose account had previously been written off (see 02/18).

A $950 utility bill for February arrived. It is due on March 15 and will be paid then.

Record the $2,800 employee salary that is owed but will be paid March 1.

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.

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:

Project 2: Part1&2 1-a. Prepare all Feoruary jourmall entries and acjusting entries [if mo entry lis required for a transactionievent, select "No Journal Entry Required in the first account fied.) Answer is not complete. No Gemeral Journal Feo. 1 Accounte Recehaole FRo. 2 neurance Epense 650 Feo. 5 Accounts Pajaole 13.500 Feo. 6 Fea. 103 27,000 Sales Raenue Feo. 100 Cos of Goods Sol 12,000 12 000 Feo. 15a Unearned Revenue 5.350 Salee Reenue 5.350 Feo. 150 Cost of Goods Sokd Feo. 150 Cost ot Goods Sols 10 Feo. 150 Sales Retuns and Allowance 4.500 Accounte Recehaole Feo. 16 2.800 Feb, 17 13,500 13230 Feo. 18 for Douotuil Accounts 2.000 Accounte Recehaole 2.000 3.300 3.300 Feo. 19a Rent Expenee Canh 6600 Feo. 190 9,840 Sales Dscounte Accounts Receveole Feo. 26a Alowance for Douorul Accounta Fea 250 Accounts Recevaoie Feo. 27 ty Expense Accounts Pajaole Feo. 28 vidends Declared Fea 29a 23000 agee Payable 2.800 Feo. 290 Bad Dest Expense or DouseCul Accounts Feo. 29c nberest Expense intereet Payadile Feo 290 ntereet Receaole rtereet Revenue

Explanation / Answer

Solution:

Entry # 6 --- Feb 10b

First of all we need to calculate the cost of goods sold on Feb 10.

Cost of Goods Available for sale

Cost of Goods Sold (FIFO method)

Units

Total Cost

$ / Unit

Units

Cost per unit

Total Cost

Beg Invnetory

35

$2,800

$80.00

35

$80

$2,800

Purchases 02/05 (including freight)

180

$13,860

(13,500 + $360)

$77.00

115

$77

$8,855

150

$11,655

The correct journal entry on Feb 10

Transaction

Date

General Journal

Debit

Credit

6)

Feb 10b

Cost of Goods Sold

$11,655

Inventory

$11,655

Entry # 8 --- Feb 15b –

Inventory Balance on Feb 15 before sale of 30 Units = 215 Units (35 + 180 – 150)

Value of Inventory = 215 Units x $77 = $16,555

Units Sold on Feb 15 = 30 Units

Cost of Goods Sold of 30 Units = 30 Units x 77 = $2,310

Correct journal entry is

Transaction

Date

General Journal

Debit

Credit

8

Feb 15b

Cost of Goods Sold

$2,310

Inventory

$2,310

Entry # 9 --- Feb 15a –

We need to calculate the average cost of units that were sold on Feb 10. Since we don’t know the return units are from beginning Inventory or from the purchase of Feb 05.

Unit Average Cost = $11,655 / 150 Units = $77.70

Cost of Returned Inventory = 25 Units x 77.70 = $1,942.50 or $1,943

Transaction

Date

General Journal

Debit

Credit

9

Feb 15a

Inventory

$1,943

Cost of Goods Sold

$1,943

Entry # 21

WE need to prepare the T-Account of Accounts Receivable and Allowance for Doubtful Account for this purpose.

Accounts Receivable

Debit

Credit

beg. Bal

$12,650

$1,400

Feb.1 Notes Receivable

Feb.10 Sales

$27,000

$4,500

Feb.15 Sales Return

Feb26a

$600

$2,000

Feb.18 Write off

$10,000

Feb.19 collection

$600

Feb.26b

Ending Bal.

$21,750

Allowance for Doubtful Accounts

Debit

Credit

Feb.18 Wrote off

$2,000

$1,900

beg. Bal.

$600

Feb26a

$1,240

Feb.29b bad Debt expense (Bal.fig)

Ending Balance (8%*21750)

$1,740

Correct entry

Transaction

Date

General Journal

Debit

Credit

21

Feb.29b

Bad Debt Expense

$1,240

Allowance for Doubtful Accounts

$1,240

Hope the above calculations, working and explanations are clear to you and help you in understanding the concept of question.... please rate my answer...in case any doubt, post a comment and I will try to resolve the doubt ASAP…thank you

Cost of Goods Available for sale

Cost of Goods Sold (FIFO method)

Units

Total Cost

$ / Unit

Units

Cost per unit

Total Cost

Beg Invnetory

35

$2,800

$80.00

35

$80

$2,800

Purchases 02/05 (including freight)

180

$13,860

(13,500 + $360)

$77.00

115

$77

$8,855

150

$11,655

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