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 $ 20,270

Unearned Revenue (30 units) $ 4,900

Accounts Receivable $ 11,300

Accounts Payable (Jan Rent) $ 2,400

Allowance for Doubtful Accounts $ (1,450)

Notes Payable $ 15,500

Inventory (35 units) $ 3,150

Contributed Capital $ 6,100

Retained Earnings – Feb 1, 2012 $ 4,370

• WWC establishes a policy that it will sell inventory at $160 per unit.

• In January, WWC received a $4,900 advance for 30 units, as reflected in Unearned Revenue.

• WWC’s February 1 inventory balance consisted of 35 units at a total cost of $3,150.

• 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.

Prepare the February journal entries and adjusting entries:

02/01 Included in WWC’s February 1 Accounts Receivable balance is a $1,700 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 $1,700 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 $600 insurance premium covering the month of February. The amount paid is recorded directly as an expense.

02/05 An additional 150 units of inventory are purchased on account by WWC for $11,250 – terms 2/15, n30.

02/05 WWC paid Federal Express $300 to have the 150 units of inventory delivered overnight. Delivery occurred on 02/06.

02/10 Sales of 120 units of inventory occurred during the period of 02/07 – 02/10. The sales terms are 2/10, net 30.

02/15 The 30 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 $1,900.

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 $1,550. 02/19 $4,800 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 $9,100 of customers’ Accounts Receivable. Of the $9,100, the discount was taken by customers on $6,000 of account balances; therefore WWC received less than $9,100.

02/26 WWC recovered $510 cash from the customer whose account had previously been written off (see 02/18).

02/27 A $500 utility bill for February arrived. It is due on March 15 and will be paid then.

02/28 WWC declared and paid a $550 cash dividend.

Adjusting Entries:

02/29 Record the $1,900 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).