anthonyIM_04

CHAPTER 4 ACCOUNTING RECORDS AND SYSTEMS Changes from Eleventh Edition The chapter has been updated. Approach Instructors will differ in the coverage that they give to this chapter, depending on their personal preference and on the background of their students. For executive groups, the material may either be omitted altogether or suggested as optional reading. For students who have previously had a course in accounting, a review of this chapter is probably desirable, even though there should be nothing new in it for them. For beginning students, we find it highly desirable to give much practice in the mechanics of accounting. As pointed out in the text, this practice is intended to provide facility in a tool that will prove useful in later work in analyzing problems, rather than to make the students into expert bookkeepers. Instructors have taught a whole first course in accounting without once mentioning debit and credit. We believe that their principal motive for doing this is to prove to their colleagues that it can be done. Actually, the debit and credit mechanism is a device that permits the students to record the results of their analysis of transactions unambiguously. It also facilitates clear communication in the classroom. Discussion is likely to be cumbersome and subject to much misunderstanding if debits and credits are not required. Many of the fine points of bookkeeping are omitted from the text, but our experience has been that enough information is given so that students understand the idea of debit and credit and can use the journal, ledger, and other tools in analyzing subsequent cases. Cases The first two cases are primarily for practice and drill. It is perhaps not even necessary to discuss both of them in detail in class although some time should be allowed for students to raise questions. As in other cases, no standard terminology should be enforced although it may be in order to call attention at this point to the fact that when the name of an account is given, this precise name should be used in the journal entries. One of the cases is an unincorporated business and the other is a corporation, so that the student can observe that there is a very little difference in the recordkeeping for these two types of businesses. Also, in one case the accounting period is a year and in the other it is a month, to emphasize the similarity of accounting for these different time intervals. Copies Express is a straightforward complete cycle problem.

Waltham Oil and Lube Center involves journal entries and testing of student knowledge of common accounts. Note: Some instructors use Waltham Oil and Lube Center in any of the following chapters, or even as a review after Chapter 14. When used in this way, the instructor requires students to prepare financial statements for the company.

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Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

Problems Problem 4-1 Beg. Bal. (4) Bal.

Cash $900 $3,400 (3) 5,350 950 (5) $1,900

(3)

Accounts Receivable Beg. Bal. $3,000 $5,350 (4) (2) 6,350 Bal. $4,000

Beg. Bal. (1) Bal.

(5)

Accounts Payable $3,400 $3,600 Beg. Bal. 2,350 (1) $2,550 Bal. Notes Payable $950 $950 Beg. Bal.

Inventory $5,700 $4,150 (2) 2,350 $3,900

Problem 4-2

1) dr. Prepaid Rent...................................................................................................................................................................... $14,340 cr. Cash............................................................................................................................................................................. $14,340 Prepaid rent is an asset. 2)

dr. Sales Discounts and Allowances....................................................................................................................................... $34,150 cr. Provision for Sales Discounts and Allowances............................................................................................................ $34,150 Sales discounts and allowances is a deduction from gross sales to arrive at net sales. The provision is a liability.

3) dr. Interest Receivable............................................................................................................................................................ $35 cr. Interest Income............................................................................................................................................................ $35 Interest receivable is an asset. Interest income would be listed as other income in this period’s income statement.

4) dr. Depreciation Expense........................................................................................................................................................ $13,660 cr. Accumulated Depreciation.......................................................................................................................................... $13,660 Depreciation expense is an income statement item. Accumulated depreciation is disclosed as a deduction from the related depreciable asset.

5) dr. Cash................................................................................................................................................................................... $2,730 cr. Deferred revenue......................................................................................................................................................... $2,730 Deferred revenue is a liability.

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6) dr. Stamp Expense...................................................................................................................................................... $100 Stamp Inventory......................................................................................................................................................... $72 cr. Cash................................................................................................................................................................ $172 Stamps expense is an income statement item. Stamp inventory is an asset.

7) Bad debt expense....................................................................................................................................................... $1,350 Allowance for doubtful accounts.................................................................................................................. $1,350 Bad debt expense account is an expense account. Allowance for doubtful accounts is a contra asset displayed as a deduction from the asset accounts receivable. Problem 4-3 a.

1) dr. Inventory........................................................................................................................................................ $1,300 cr. Accounts payable....................................................................................................................................... $1,300

2) dr. Wages Expense............................................................................................................................................... $730 cr. Cash........................................................................................................................................................... $730

3) dr. Cash................................................................................................................................................................ $1,940 cr. Sales........................................................................................................................................................... $1,940

4) dr. Accounts Receivable...................................................................................................................................... $1,810 cr. Sales........................................................................................................................................................... $1,810

5) dr. Overhead and Other Expenses........................................................................................................................ $900 cr. Cash........................................................................................................................................................... $900

6) dr. Cash................................................................................................................................................................ $1,510 cr. Accounts Receivable.................................................................................................................................. $1,510

7) dr. Accounts Payable........................................................................................................................................... $1,720 cr. Cash........................................................................................................................................................... $1,720

8) dr. Cash................................................................................................................................................................ $650 cr. Deferred Revenue...................................................................................................................................... $650

9) dr. Cash................................................................................................................................................................ $200 cr. Note Payable.............................................................................................................................................. $200

10) dr. Cost of Goods Sold......................................................................................................................................... $1,280 cr. Inventory.................................................................................................................................................... $1,280

+ Beginning inventory....................................................................................................................................... $1,730 Additions........................................................................................................................................................ 1,300 Total available................................................................................................................................................ $3,030 Ending inventory............................................................................................................................................ 1,750 Cost of goods sold.......................................................................................................................................... $1,280

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Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

11) Dr. Depreciation Expense................................................................................................................................................. $300 Cr. Accumulated Depreciation............................................................................................................................. $300 b. (1)

Accounts Payable $1,720 $3,070 1,300 (1)

Accounts Receivable $2,160 1,510 (6) (4) 1,810

Accumulated Depreciation $2,800 300 (11)

(2) (5) (10) (11)

(3) (1) (8) (9)

Cash $1,440 $ 730 (2) 1,940 900 (5) 1,510 1,720 (7) 650 200

(1)

Inventories $1,730 $1,280 (10) 1,300

Allowance for Doubtful Accounts $70 Fixed Assets (cost) $6,200

Notes Payable $600 200 (9)

Owners’ Equity $7308 Wages $4,990 Overhead 900 1,940 Sales (3) COGS 1,280 1,810 Sales (4) Depreciation 300

Deferred Revenue $650 (8)

See above d. LUFT CORPORATION Balance Sheet

Assets Liabilities Cash........................................................................................................................................................................................... $2,390 Accounts payable................................................................................... $2,650 Accounts receivable (net)........................................................................................................................................................... 2,390 Deferred revenue.................................................................................... 650 Inventories................................................................................................................................................................................. 1,750 Current liabilities............................................................................... 3,300 Current assets........................................................................................................................................................................ $6,530 Notes payable.................................................................................... 800 Total liabilities................................................................................... 4,100 Fixed assets................................................................................................................................................................................ $6,200 Owner’s equity Accumulated depreciation.......................................................................................................................................................... (3,100) Owner’s equity....................................................................................... 5,530 Total liabilities Total assets............................................................................................................................................................................ $9,630 and owners’ equity............................................................................. $9,630

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e.

LUFT CORPORATION Income Statement Sales............................................................................................................................................ $3,750 Cost of goods sold....................................................................................................................... 1,280 Gross margin............................................................................................................................... 2,470 Wages.......................................................................................................................................... 730 Overhead..................................................................................................................................... 900 Depreciation................................................................................................................................ 300 Net income.................................................................................................................................. $ 540 Problem 4-4 a. Cash and Equivalents $119,115 $119,115

Accounts Receivable $162.500 $162,500

Store Equipment $215,000 $215,000

Merchandise Inventory $700,680 $302,990 $397,690

Supplies Inventory $15,475 $10,265 (3) $5,210

Prepaid Insurance $38,250 $4,660 (4) $33,590

Selling Expense $24,900 24,900 (a) (6)

(1)

(3)

Cost of Goods Sold $302,990 $302,990 (h)

Sales Salaries $105,750 3,575 109,325 (b)

Depreciation Expense (2) $12,750 $12,750 (i)

Supplies Expense $10,265 $10,265 (j)

(4)

Accrued Interest $3,730 (5) $3,730

(7)

(1)

Insurance Expense $4,660 $4,660 (k) Accrued Sales Salaries $3,575 (6) $3,575

Interest Receivable 390 390

(l)

5

Interest Income 390 390 (7)

Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

Miscellaneous General Expenses $31,000 31,000 (c)

(5)

(d)

Interest Expense $9,300 3,730 $13,030 (e)

Social Security Taxes $9, 600 $9,600 (f)

Accumulated Depreciation $37,300 12,750 (2) $50,050

Accounts Payable $118,180 $118,180

Notes Payable $143,000 $143,000

Common Stock $300,000 $300,000

Retained Earnings $122,375 192,585 (m) $314,960

(a) (b) (c) (d) (e) (f) (h) (i) (j) (k) (m)

Sales Discounts 6,220 $6,220

(g)

Sales $716,935 $716,935

Profit and Loss 24,900 716, 935 (g) 109,325 390 (l) 31,000 6,220 13,030 9,600 302,990 12,750 10,265 4,660 192,585

Adjusting entries are:

(1) dr. Cost Of Goods Sold................................................................................................................................................... $302,990 cr. Merchandise Inventory.......................................................................................................................................... $302,990

(2) dr. Depreciation Expense................................................................................................................................................ $12,750 cr. Accumulated Depreciation.................................................................................................................................... $12,750

(3) dr. Supplies Expense....................................................................................................................................................... $10,265 cr. Supplies Inventory................................................................................................................................................. $10,265

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(4) dr. Insurance Expense........................................................................................................................................ $4,660 cr. Prepaid Insurance..................................................................................................................................... $4,660

(5) dr. Interest Expense............................................................................................................................................ $3,730 cr. Accrued Interest........................................................................................................................................ $3,730

(6) dr. Sales Salaries................................................................................................................................................ $3,575 cr. Accrued Sales Salaries.............................................................................................................................. $3,575

(7) dr. Interest Receivable........................................................................................................................................ $390 cr. Interest Income......................................................................................................................................... $390 Closing entries are:

(a) dr. Profit and Loss.............................................................................................................................................. $24,900 cr. Selling Expense........................................................................................................................................ $24,900

(b) dr. Profit and Loss.............................................................................................................................................. $109,325 cr. Sales Salaries............................................................................................................................................ $109,325

(c) dr. Profit and Loss.............................................................................................................................................. $31,000 cr. Miscellaneous General Expenses.............................................................................................................. $31,000

(d) dr. Profit and Loss.............................................................................................................................................. $6,220 cr. Sales Discounts......................................................................................................................................... $6,220

(e) dr. Profit and Loss.............................................................................................................................................. $13,030 cr. Interest Expense....................................................................................................................................... $13,030

(f) dr. Profit and Loss.............................................................................................................................................. $9,600 cr. Social Security Taxes................................................................................................................................ $9,600

(g) dr. Sales.............................................................................................................................................................. $716,935 cr. Profit and Loss.......................................................................................................................................... $716,935

(h) dr. Profit and Loss.............................................................................................................................................. $302,990 cr. Cost of Goods Sold................................................................................................................................... $302,990

(i) dr. Profit and Loss.............................................................................................................................................. $12,750 cr. Depreciation Expense............................................................................................................................... $12,750

(j) dr. Profit and Loss.............................................................................................................................................. $10,265 cr. Supplies Expense...................................................................................................................................... $10,265

(k) dr. Profit and Loss.............................................................................................................................................. $4,660 cr. Insurance Expense.................................................................................................................................... $4,660

(l) dr. Interest Income............................................................................................................................................. $390 cr. Profit and Loss.......................................................................................................................................... $390

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Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

(m) dr. Profit and Loss........................................................................................................................................................... $192,585 cr. Retained Earnings................................................................................................................................................. $192,585

DINDORF COMPANY Income Statement for the year ----. Sales...................................................................................................................................................................... $716,935 Sales discounts...................................................................................................................................................... (6,220) Net sales................................................................................................................................................................ 710,715 Cost of goods sold................................................................................................................................................. 302,990 Depreciation.......................................................................................................................................................... 12,750 Sales salaries......................................................................................................................................................... 109,325 Selling expense...................................................................................................................................................... 24,900 Supplies expense................................................................................................................................................... 10,265 Insurance expense................................................................................................................................................. 4,660 Social Security taxes............................................................................................................................................. 9,600 Miscellaneous general expenses............................................................................................................................ 31,000 Interest expense..................................................................................................................................................... 13,030 Interest income...................................................................................................................................................... 390 Net income............................................................................................................................................... $192,585 DINDORF COMPANY Balance Sheet as of January 31, ----.

Assets Liabilities Cash and cash equivalent................................................................................................................................................................ $119,115 Accounts payable.................................................................................. $118,180 Accounts receivable........................................................................................................................................................................ 162,500 Accrued interest.................................................................................... 3,730 Merchandise inventory.................................................................................................................................................................... 397,690 Accrued sales salaries........................................................................... 3,575 Supplies inventory........................................................................................................................................................................... 5,210 Current liabilities.................................................................................. 125,485 Prepaid insurance............................................................................................................................................................................ 33,590 Interest receivable........................................................................................................................................................................... 390 Notes payable....................................................................................... 143,000 Current assets.................................................................................................................................................................................. 718,495 Total liabilities......................................................................... 268,485 Owners’ Equity Store equipment.............................................................................................................................................................................. 215,000 Common stock...................................................................................... 300,000 Accumulated depreciation............................................................................................................................................................... (50,050) Retained earnings................................................................................. 314,960 Total liabilities Total assets................................................................................................................................................................................. $883,445 and owners’ equity........................................................................... $883,445

Cases Case 4- 1: PC Depot Note: This case is unchanged from the Eleventh Edition. Approach This is a way of easing gently into the debit-credit mechanism and the complete accounting cycle. Students usually need such a simple problem to build up their confidence in journalizing and posting transactions.

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Comments on Questions Question 1 Students should describe each transaction along the lines: “Barbara Thompson started PC Depot by investing $65,000 of her own money and $100,000 borrowed from the bank, so her initial cash balance was $165,000.” Question 2 (These accounts are shown under question 3.) Question 3

General Journal (cont’d) (9) Cash................................................................................................................................................................... 38,000 Sales.............................................................................................................................................................. 38,000 (10) Accounts Receivable.......................................................................................................................................... 14,850 Sales.............................................................................................................................................................. 14,850 (11) Cash................................................................................................................................................................... 3,614 Accounts Receivable..................................................................................................................................... 3,614 (12) Accounts Payable............................................................................................................................................... 96,195 Cash............................................................................................................................................................... 96,195 (13) Merchandise Inventory...................................................................................................................................... 49,940 Accounts Payable.......................................................................................................................................... 49,940 (14) Cost of Sales...................................................................................................................................................... 38,140 Merchandise Inventory.................................................................................................................................. 38,140 (15) Wages Expense.................................................................................................................................................. 688 Cash............................................................................................................................................................... 688 (16) Wages Expense.................................................................................................................................................. 440 Accrued Wages.............................................................................................................................................. 440 (17) Prepaid Rent...................................................................................................................................................... 1,485 Cash............................................................................................................................................................... 1,485 (18) Prepaid Insurance............................................................................................................................................... 2,310 Cash............................................................................................................................................................... 2,310 (19) Utilities Expense................................................................................................................................................ 226 Accounts Payable.......................................................................................................................................... 226 (20) Furniture and Fixtures........................................................................................................................................ 1,760 Cash............................................................................................................................................................... 660 Accounts Payable.......................................................................................................................................... 1,100

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Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

PC DEPOT Balance Sheet as of September 30 Assets Cash................................................................................................................................................................................................ $84,661 Accounts receivable........................................................................................................................................................................ 11,236 Merchandise inventory.................................................................................................................................................................... 149,300 Prepaid insurance............................................................................................................................................................................ 2,117 Prepaid rent..................................................................................................................................................................................... 1,485 Furniture and fixtures...................................................................................................................................................................... $17,260 Accumulated depreciation.......................................................................................................................................................... ( 144) 17,116 Total Assets................................................................................................................................................................................ $265,915 Liabilities ant Owners’ Equity Accounts payable............................................................................................................................................................................ $92,571 Accrued wages................................................................................................................................................................................ 440 Bank loan payable........................................................................................................................................................................... 100,000 Interest payable............................................................................................................................................................................... 1,250 Proprietor’s capital.......................................................................................................................................................................... 65,000 Retained earnings............................................................................................................................................................................ 6,654 Total Liabilities and Owners’ Equity.......................................................................................................................................... $265,915

PC DEPOT Income Statement for September Sales................................................................................................................................................................................................ $52,850 Cost of sales.................................................................................................................................................................................... 38,140 Gross margin.............................................................................................................................................................................. 14,710 Expenses: Wages.................................................................................................................................................................................... $2,063 Advertising............................................................................................................................................................................ 1,320 Office supplies....................................................................................................................................................................... 1,100 Utilities.................................................................................................................................................................................. 501 Rent....................................................................................................................................................................................... 1,485 Insurance............................................................................................................................................................................... 193 Interest................................................................................................................................................................................... 1,250 Depreciation.......................................................................................................................................................................... 144 8,056 Net income...................................................................................................................................................................................... $ 6,654

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LEDGER (1) (9) (11)

Cash 165,000 (2) 38,000 (4) 3,614 (5) (6) (7) (8) (12) (15) (17) (18) (20)

(18)

Prepaid Insurance 2,310 (23)

(4) (20)

Furniture and Fixtures 15,500 1,760

(10)

Accounts Receivable 14,850 (11)

1,485 15,500 1,320 935 1,100 275 96,195 688 1,485 2,310 660

(3) (13)

(12)

193

3,614

Rent Expenses 1,485 (24)

(5)

Accounts Payable 96,195 (3) (13) (19) (20) Accrued Wages (16)

(17) (2)

Merchandise Inventory 137,500 (14) 49,940

Advertising Expense 1,320

137,500 49,940 226 1,100 440

Bank Loan Payable (1)

100,000

Proprietor’s Capital (1)

65,000

Prepaid Rent 1,485 Sales 52,850 (9) (10)

(14)

Cost of Sales 38,140

(21)

Depreciation Expense 144

(6) (15) (16)

Wages Expense 935 688 440

(7)

Office Supplies Expense 1,100

Accumulated Depreciation (21)

(8) (19)

Utilities Expense 275 226

Interest Payable (22)

11

38,140

38,000 14,850

144 1,250

Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

Interest Expense 1,250

(22)

(23)

Retained Earnings (25)

Income Summary 6,654 (24) 52,850 (other closing entries not shown here)

(25)

Insurance Expense 193 6,654

Question 4 Other adjusting entries: (21) (22) (23)

Depreciation Expense [($15,500 + $1,760) / 10] / 12............................................................................................. 144 Accumulated Depreciation................................................................................................................................. 144 Interest Expense ($100,000 x 15%) / 12)................................................................................................................ 1,250 Interest Payable.................................................................................................................................................. 1,250 Insurance Expense ($ 2,310 / 12)............................................................................................................................ 193 Prepaid Insurance............................................................................................................................................... 193

Postings to the ledger are shown under Question 3. Note that five additional T accounts, not required for entries (1) - (20), must be created in order to post these adjusting entries. Question 5 For reasons of space, we shall illustrate only one of the entries closing the temporary accounts, plus the final closing entry: (24)

Sales........................................................................................................................................................................ 52,850 Income Summary............................................................................................................................................... 52,850 (25) Income Summary.................................................................................................................................................... 6,654 Retained Earnings............................................................................................................................................... 6,654 Note that two more T accounts have been created for the closing process. Question 6 The statements appear above. Case 4- 2: Save-Mart Note: This case is unchanged from the Eleventh Edition. Approach This is a straightforward problem in making adjusting and closing entries. Students may raise the possibility of recording social security taxes on accrued sales salaries; this has not been done in the accompanying solution.

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Questions 1-4 The journal entries and accounts for Questions 1-3 are as indicated on the worksheet that follows. (Because only one entry per account is involved, to save space we have used a worksheet here, even though the students were asked to use T-accounts.) The financial statements for Question 4 are shown below. SAVE-MART COMPANY Balance Sheet as of February 28

Assets Current assets:.................................................................................................................................................................... Cash............................................................................................................................................................................... $ 88,110 Accounts receivable...................................................................................................................................................... 127,430 Merchandise inventory.................................................................................................................................................. 298,347 Supplies inventory......................................................................................................................................................... 3,877 Prepaid insurance.......................................................................................................................................................... 5,305 Toted current assets.................................................................................................................................................. 523,069 Plant and Equipment:......................................................................................................................................................... Store equipment............................................................................................................................................................. $ 70,970 Less: Accumulated depreciation.................................................................................................................................... ( 21,559) 49,411 Total assets......................................................................................................................................................................... $572,480 Equities Liabilities Accounts payable.......................................................................................................................................................... $ 88,970 Notes and wages payable............................................................................................................................................... 90,840 Interest payable............................................................................................................................................................. 865 Total liabilities.......................................................................................................................................................... 180,675 Stockholders’ equity:.......................................................................................................................................................... Common stock $100,000 Retained earnings 291,805 391,805 Total equities...................................................................................................................................................................... $572,480

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Accounting: Text and Cases 12e – Instructor’s Manual

Anthony/Hawkins/Merchant

SAVE-MART COMPANY Income Statement for the Year Ended February 28 Gross sales...................................................................................................................................................................................... $988,700 Less: Sales discount 3,340 Net sales.......................................................................................................................................................................................... 985,360 Less: Cost of goods sold................................................................................................................................................................. 604,783 Gross margin................................................................................................................................................................................... 380,577 Less: Expenses Selling expense........................................................................................................................................................................... $10,880 Sales salaries.............................................................................................................................................................................. 49,480 Miscellaneous general expense.................................................................................................................................................. 18,930 Interest Expense......................................................................................................................................................................... 7,965 Social security tax expense......................................................................................................................................................... 3,400 Depreciation expense................................................................................................................................................................. 10,139 Supplies used.............................................................................................................................................................................. 13,603 Insurance expenses..................................................................................................................................................................... 7,125 Bank services charges................................................................................................................................................................ 750 Total expenses....................................................................................................................................................................... 122,272 Net income...................................................................................................................................................................................... $258,305 SAVE-MART Worksheet

Balances Adjusted February 28 Adjustments Balances dr. cr. dr. cr. dr. cr. Cash................................................................................................................................................................................................ 88,860 (7) 750 88,110 Accounts receivable........................................................................................................................................................................ 127,430 127,430 Merchandise inventory.................................................................................................................................................................... 903,130 (1) 604,783 298,347 Store equipment.............................................................................................................................................................................. 70,970 70,970 Supplies inventory........................................................................................................................................................................... 17,480 (3) 13,603 3,877 Prepaid insurance............................................................................................................................................................................ 12,430 (4) 7,125 5,305 Accumulated 11,420 (2) 10,139 21,559 depreciation..................................................................................................................................................................................... Accounts payable 88,970 88,970 Notes and wages 88,500 (6) 2,340 90,840 payable............................................................................................................................................................................................ Interest payable............................................................................................................................................................................... (5) 865 865 Common stock................................................................................................................................................................................ 100,000 100,000 Retained earnings............................................................................................................................................................................ 33,500 _______ 33,500 594,039 335,734 Sales................................................................................................................................................................................................ 988,700 988,700 Sales discounts................................................................................................................................................................................ 3,340 3,340 Selling expense............................................................................................................................................................................... 10,880 10,880 Sales salaries................................................................................................................................................................................... 47,140 (6) 2,340 49,480 Miscellaneous general expense........................................................................................................................................................................................ 18,930 18,930 Interest expense............................................................................................................................................................................... 7,100 (5) 865 7,965 Social security tax........................................................................................................................................................................... 3,400 3,400 Bank service charges....................................................................................................................................................................... (7) 750 750

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Cost of goods sold.............................................................................................................................................................. (1) 604,783 604,783

Depreciation....................................................................................................................................................................... (2) 10,139 10,139

Supplies expense................................................................................................................................................................ (3) 13,603 13,603

Insurance expense.............................................................................................................................................................. ________ ________ (4) 7,125 _______ 7,125 ________ 1,311,090

1,311,090

639,605

639,605

1,324,434

1,324,434

Case 4- 3: Copies Express Note: This case is updated from the Eleventh Edition. Approach This is a straightforward complete cycle accounting problem. The transactions and financial statements follow. Some students may develop a cost of sales amount, including wages, supplies, and perhaps some other items. Actually, the case data are not complete enough to know which of Copies Express’ expenses are analogous to cost of goods sold for a manufacturing firm, and which are definitely period expenses (e.g., a portion of utilities). These students’ efforts should not be discouraged at this point, as they are making good efforts to incorporate important concepts despite the limitations in the data presented. Rather, the students’ efforts can be used to raise the question of whether it would be useful for Copies Express to have a gross margin figure, assuming one could be developed with some elaboration of the chart of accounts.

(1) (2)

(3) (4) (5) (6) (7) (8) (9) (10)

Journal Entries Cash........................................................................................................................................................................ 176,450 Sales................................................................................................................................................................... 176,450 Accounts Receivable.............................................................................................................................................. 64,750 Sales................................................................................................................................................................... 64,750 Cash........................................................................................................................................................................ 64,750 Accounts Receivable.......................................................................................................................................... 64,750 Wages and Salaries (expense)................................................................................................................................. 85,750 Cash.................................................................................................................................................................... 85,750 Heat, Light, and Power (expense)........................................................................................................................... 15,000 Cash.................................................................................................................................................................... 15,000 Supplies Inventory ................................................................................................................................................. 52,600 Cash.................................................................................................................................................................... 52,600 Selling and Administration (expense)..................................................................................................................... 28,375 Cash.................................................................................................................................................................... 28,375 Interest Expense...................................................................................................................................................... 2,880 Cash.................................................................................................................................................................... 2,880 Bank Loan.............................................................................................................................................................. 12,000 Cash.................................................................................................................................................................... 12,000 Accounts Payable................................................................................................................................................... 10,400 Cash.................................................................................................................................................................... 10,400 Supplies Inventory.................................................................................................................................................. 9,875 15

Accounting: Text and Cases 12e – Instructor’s Manual

(11) (12) (13) (14) (15)

Anthony/Hawkins/Merchant

Accounts Payable............................................................................................................................................................ 9,875 Depreciation Expense.......................................................................................................................................................... 15,000 Accumulated Depreciation.............................................................................................................................................. 15,000 Accounts Receivable........................................................................................................................................................... 11,000 Sales................................................................................................................................................................................ 11,000 Cost of Supplies Used......................................................................................................................................................... 60,250 Supplies Inventory.......................................................................................................................................................... 60,250 Tax Expense........................................................................................................................................................................ 11,593 Taxes Payable.................................................................................................................................................................. 11,593 At this point, the above entries can be posted, and temporary accounts closed to Income Summary. The final entry closes Income Summary to Retained Earnings Income Summary................................................................................................................................................................ 33,352 Retained Earnings........................................................................................................................................................... 33,352

COPIES EXPRESS Income Statement For the Year Ended December 31, 2006 Sales................................................................................................................................................................................................ $252,200 Operating expenses:........................................................................................................................................................................ Cost of supplies used.................................................................................................................................................................. $60,250 Wages and salaries..................................................................................................................................................................... 85,750 Heat, light, and power................................................................................................................................................................ 15,000 Selling and administration.......................................................................................................................................................... 28,375 Depreciation............................................................................................................................................................................... 15,000 Total...................................................................................................................................................................................... 204,375 Operating income............................................................................................................................................................................ 47,825 Interest expense............................................................................................................................................................................... 2,880 Income before taxes........................................................................................................................................................................ 44,945 Federal income taxes....................................................................................................................................................................... 11,593 Net income................................................................................................................................................................................. $ 33,352 COPIES EXPRESS Balance Sheet as of December 31, 2006

Assets

Current assets.................................................................................................................................................................................. Cash (2,000 + 241,200 - 207,005).............................................................................................................................................. $ 36,195 Accounts receivable................................................................................................................................................................... 11,000 Supplies inventory (24,400 + 52,600 + 9,875 - 60,250)............................................................................................................ 26,625 Total...................................................................................................................................................................................... $ 73,820 Property, plant and equipment......................................................................................................................................................... Building and equipment............................................................................................................................................................. $300,000 Less: Accumulated depreciation................................................................................................................................................. 15,000 285,000 Land........................................................................................................................................................................................... 12,000 Total Assets........................................................................................................................................................................... 297,000 $370,820

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Liabilities and Owners’ Equity Current liabilities................................................................................................................................................................ Accounts payable (10,400 – 10,400 + 9,875)................................................................................................................ 9,875 Taxes payable................................................................................................................................................................ 11,593 Total.......................................................................................................................................................................... $ 21,468 Long-term debt:.................................................................................................................................................................. Bank loan...................................................................................................................................................................... 12,000 Owners’ equity:.................................................................................................................................................................. Capital stock.................................................................................................................................................................. 304,000 Retained earnings.......................................................................................................................................................... 33,352 Total...................................................................................................................................................................... 337,352 Total liabilities and owners’ equity..................................................................................................................................... $370,820

Case 4-4 Waltham Oil and Lube Center, Inc. Note: A new case for the Twelfth Edition Approach The case is designed to give students a bookkeeping experience within a class discussion that is more interesting that the typical bookkeeping class. The case asks students to prepare the journal entries for a new business’ initial three months of operations; derive directly from the journal entries certain end of the period account balances; and comment on several accounting policy decisions facing the management. The journal entry requirement is straightforward, but some students may find it somewhat difficult because the entries must be prepared using a case format rather than a problem format. The class discussion of account balances is designed to test the students’ understanding of account definitions and the relationship of journal entries to the account balances. Finally, the case includes several additional actual and potential transactions that will generate class discussion as to the correct way to account for the transaction. This latter discussion and the account balance discussion can be combined. Some instructors use the case to discuss the complete accounting cycle. If the case is used for this purpose, the instructor must assign the questions for this assignment. Since students in the early stages of the course (up through Chapter 4) may have trouble with this challenging assignment, instructors using the case for a discussion of the full accounting cycle usually assign the case later in the course (Chapter 5 onwards.) Question 1 The journal entries are: 1) $40,000 Capital contribution Cash Capital

40,000 40,000

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2) $40,000 Deposit with National Deposit – National Cash 3) $6,000 furniture purchase Furniture Cash 4) $10,000 Capital contribution Cash Capital

40,000 40,000 6,000 6,000 10,000 10,000

5) $1,200 Insurance payment (12 months) Prepaid Insurance Cash 6) $35,450 deductions from deposit Oil and grease inventory Operating supplies and uniforms Equipment Deposit 7) $1500 Lease payment Lease expense Cash 8) $49,800 Equipment payable Equipment Equipment payable 9) $108,600 Bank deposits Cash Parking revenue Services revenue 10) $8,230 Inventory purchases (oil and grease) Inventory Cash 11) $34,560 Payroll payments Payroll expense Cash 12) $1700 Utilities payments Utilities expense Cash 13) $6,600 miscellaneous payments Miscellaneous expenses Cash 14) $26,400 Lease payments Lease expense Cash 15) $2,490 Equipment payables payments Equipment payable Cash 16) $4,500 Withdrawals (Knight) Withdrawals Cash

1,200 1,200 6,320 4,130 25,000 35,450 1,500 1,500 49,800 49,800 108,600 3,300 105,300 8,230 8,230 34,560 34,560 1,700 1,700 6,600 6,600 26,400 26,400 2,490 2,490 4,500 4,500

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17) $340 Receivable – parking Accounts receivable Parking Revenues 18) $730 Receivable – local merchant Accounts receivable Service Revenues 19) $2100 Unpaid payroll Payroll expense Accrued payroll 20) $350 Unpaid utilities Utilities expense Accrued utilities 21) $9,260 Cost of Sales (oil and grease)1 Cost of Sales Inventory 22) $150 Furniture depreciation2 Depreciation expense Accumulated depreciation 23) $3,750 Equipment depreciation3 Depreciation expense Accumulated depreciation 24) $400 August parking prepayments Cash Deferred parking revenue 25) $300 Insurance expense4 Insurance expense Prepaid Insurance

340 340 730 730 2100 2100 350 350 9,260 9260 150 150 3,750 3,750 400 400 300 300

Question 2 A) Capital Knight has made two capital contributions ($40,000 and $10,000.) The total is $50,000. Some students may want to include retained earnings in their capital amount. They should be encouraged not to do this as accounting has a separate account for retained earnings for a good reason – to show how much of the company’s profits have been invested in the business. Similarly, the capital account is kept separate from retained earnings to show how much the owners have contributed to the business.

1

Beginning Inventory $ 6,320 Purchases 8,230 Total Available $14,550 Ending Inventory 5,290 Cost of Sales $9,260 2

($6,000/ 10 years) x .25 = $150 ($75,000/ 5 years) x .25 = $3,750 4 $1200 x .25 = $300 3

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B) Accumulated depreciation The accumulated depreciation account is the sum of two amounts ($150 and $3,750.) The balance is $3,900. Students should be encouraged to explain why depreciable assets are reported at cost with the accumulated depreciation account shown as a contra asset account. Statement users want to know the cost of the assets being used and the extent to which they have been depreciated. Statement users can use their data to estimate the average age of a depreciable asset (accumulated depreciation / annual straight-line depreciation expense.) C) Prepaid Asset The only prepaid asset is prepaid insurance. The balance is $900 ($1200 - $300.) One-quarter of the insurance coverage benefit has expired ($1200 x .25.) Students should be asked why was the insurance payment was not expensed on May 1. The answer is it met the definition of an asset (future economic benefits) and its expiration accounting is influenced by the matching concept. D) Cash balance The cash T account is (Journal entry indicated) Cash 1) 40,000 2) 40,000 4) 10,000 3) 6,000 9) 108,600 5) 1,200 24) 400 7) 1,500 10) 8,230 11) 34,560 12) 1,700 13) 6,600 14) 26,400 15) 2,490 16) 4,500 Balance 25,820 The cash balance is $25,820. Some students might argue the $400 prepaid parking checks do not belong in the July 31 cash balance. In their view the payment was not received until after that date. The case is deliberately vague on this point. The instructor can use this vagueness to raise the question as to the significance of “cut off” dates. E) Accounts Receivable Waltham Center is owed $340 by overnight parkers and $730 by local merchants. The accounts receivable balance is $1070. Here or later in the class, the bad debt issue can be discussed. In either case the instructor should take advantage of the issue to illustrate how bad debt accounting works and have the class discuss why accounts receivable are reported net of bad debt allowance (assets should be reported at their net realized value.)

F) Liabilities

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There are three liabilities at the end of the three month operating period. Two are the current liabilities accrued payroll $2,100 and accrued utilities $350. The third is the longer term obligation for the equipment ($47,310.) The liability account balance is $49,760. During the liability discussion the instructor should ask what is the current liability balance? The correct answer is $12,410 ($12,410 = $2,100 + 350 + 9,960 current maturity of equipment payable [$830 + 12 = $9,960]). The two accrued liabilities mentioned above plus the current maturity on the long-term obligation. The instructor should use the discussion to review the distinction between current and non current balance sheet accounts. Some advanced students may challenge the liability total. They may want to impute an interest charge on the “non interest bearing note.” If students do not raise this issue, the instructor is well advised not to raise it. The class is not ready at this time for a present value-type discussion. Question 2 a) Withdrawals The amount of the withdrawals is not the interesting question. The interesting question is how should Knight view his withdrawals in his assessment of the progress of his business to date. Is the $4,500 withdrawal a dividend? Wages? If Knight is trying to assess how well his business has done, he might account for the withdrawals as “wages.” On the other hand, if he is trying to answer how much he has earned on his investment, he might regard the withdrawals as “dividends.” In either case the instructor might consider including the opportunity cost of wages foregone by not working elsewhere. b) Cost of Sales See note to cost of sales journal entry. c) Parking revenues The amount is $3,640 ($3,300 cash received plus $340 owed.) Some students may want to deduct a bad debt provision from gross revenues. Accounting does not work that way. It reports provisions for bad debts as an expense item. Other students may want to include the $400 prepaid August parking. This would be an error. The prepayment has not been earned (it has been realized.) It is a deferred revenue item (a liability.) d) Lease Expenses The total amount is $27,900 (May $1500 prepaid flat rental plus $3,000 June – July flat rental paid plus $23,400 per car $10 payments.) Some students will forget the prepaid May rental. This discussion gives the instructor an opportunity to discuss how a prepaid expense becomes an expense. e) Total Revenues Total revenues is the sum of parking revenues ($3,640) cash service revenues ($105,300) and credit service sales ($730.) The amount is $109,670. Some students may forget the credit service sales. The service and rental revenues should be reported separately. In this way the profitability of each activity can be assessed. Question 4 21

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Some instructors use the revenue and bad debts discussion here and above as a lead into or part of their Chapter 5 assignments. Since the checks were received before the end of the accounting period, the $400 prepaid August parking checks are part of the end of period cash balance. The offsetting credit is to deferred revenues (realized but not earned.) See discussion above. A provision for bad debt might be considered. Some of the parkers may not belong to the “permanent” local population and might “skip town” without paying. Also, small businesses have a high rate of bankruptcy. On the other hand, given the low level of receivables, any bad debt allowance might not be material enough to warrant accounting recognition of a bad debt allowance. The family use of the Waltham Center should generate considerable discussion. Is the family use revenue? A cost? A withdrawal? Measured at retail? Measured at cost? Worth worrying about? Accounting, if the amount is material, treats the family use as a withdrawal measured at cost. This use is not an expense associated with revenues (matching.) It is not a revenue (not realized.) The amount is not measured at retail (accounting does not recognize opportunity costs.) Measurement at cost reflects the replacement cost value of the asset transferred to the owners. In this case the cost is probably worth worrying about since the family use is a form of “leakage” that may become more significant and distort the operating results if not controlled. (Technically, the family use is an income item for tax purposes, which might motivate management to use a cost based measure ment.)

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