Question

  Cash $ 21,020 Unearned Revenue (35 units) $ 5,150      Accounts Receivable $ 12,050 Accounts Payable...

  Cash $ 21,020 Unearned Revenue (35 units) $ 5,150   
  Accounts Receivable $ 12,050 Accounts Payable (Jan Rent) $ 2,900   
  Allowance for Doubtful Accounts $ (1,700) Notes Payable $ 14,000   
  Inventory (40 units) $ 3,400 Contributed Capital $ 6,600   
Retained Earnings – Feb 1, 2012 $ 6,120   

WWC establishes a policy that it will sell inventory at $150 per unit.
In January, WWC received a $5,150 advance for 35 units, as reflected in Unearned Revenue.
WWC’s February 1 inventory balance consisted of 40 units at a total cost of $3,400.
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 $1,400 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 9% annual interest. The principal and all interest will be due and payable to WWC on August 1, 2012.

02/02

WWC paid a $850 insurance premium covering the month of February. The amount paid is recorded directly as an expense.

02/05

An additional 200 units of inventory are purchased on account by WWC for $15,000 – terms 2/15, n30.

02/05

WWC paid Federal Express $600 to have the 200 units of inventory delivered overnight. Delivery occurred on 02/06.

02/10

Sales of 170 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.

02/15

The 35 units that were paid for in advance and recorded in January are delivered to the customer.

02/15

30 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 $2,400.
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 $1,800.
02/19

$5,800 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 $9,600 of customers’ Accounts Receivable. Of the $9,600, the discount was taken by customers on $7,000 of account balances; therefore WWC received less than $9,600.

02/26

WWC recovered $560 cash from the customer whose account had previously been written off (see 02/18).

02/27

A $750 utility bill for February arrived. It is due on March 15 and will be paid then.

02/28 WWC declared and paid a $600 cash dividend.

Adjusting Entries:
02/29

Record the $2,400 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)

PREPARE AN INCOME STATEMENT

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