chap 004

Chapter 04 - Accounting Records and Systems

CHAPTER 4ACCOUNTING RECORDS AND SYSTEMS

Changes from Twelfth Edition

The chapter has been updated from the Twelfth Edition.

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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Problems

Problem 4-1

Cash Accounts PayableBeg. Bal. $900 $3,400 (3) (3) $3,400 $3,600 Beg. Bal.

(4) 5,350 950 (5) 2,350 (1)Bal. $1,900 $2,550 Bal.

Accounts Receivable Notes PayableBeg. Bal. $3,000 $5,350 (4) (5) $950 $950 Beg. Bal.

(2) 6,350Bal. $4,000

InventoryBeg. Bal. $5,700 $4,150 (2)

(1) 2,350Bal. $3,900

Problem 4-2

1) dr. Prepaid Rent.......................................................................................................................................................................................$14,340cr. Cash..............................................................................................................................................................................................$14,340

Prepaid rent is an asset.

2) dr. Sales Discounts and Allowances........................................................................................................................................................$34,150cr. 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.............................................................................................................................................................................$35cr. 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........................................................................................................................................................................$13,660cr. 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....................................................................................................................................................................................................$2,730cr. Deferred revenue..........................................................................................................................................................................$2,730

Deferred revenue is a liability.

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6) dr. Stamp Expense...................................................................................................................................................................................$100Stamp Inventory......................................................................................................................................................................................$72

cr. Cash..............................................................................................................................................................................................$172Stamps expense is an income statement item. Stamp inventory is an asset.

7) Bad debt expense.....................................................................................................................................................................................$1,350Allowance 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..................................................................................................................................................................................$730cr. Cash...............................................................................................................................................................................................$730

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

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

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

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

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

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

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

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

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

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11) Dr. Depreciation Expense........................................................................................................................................................................$300Cr. Accumulated Depreciation...................................................................................................................................................$300

b. Accounts Payable Accounts Receivable

(1) $1,720 $3,070 $2,160 1,510 (6)1,300 (1) (4) 1,810

Accumulated Depreciation Allowance for Doubtful Accounts$2,800 $70

300 (11)

Cash Fixed Assets (cost)$1,440 $ 730 (2) $6,200

(3) 1,940 900 (5)(1) 1,510 1,720 (7)(8) 650

(9) 200

Inventories Notes Payable$1,730 $1,280 (10) $600

(1) 1,300 200 (9)

Owners’ Equity Deferred Revenue(2) Wages $7308 $4,990 $650 (8)(5) Overhead 900 1,940 Sales (3)

(10) COGS 1,280 1,810 Sales (4)(11) Depreciation 300

See above

d.LUFT CORPORATION

Balance SheetAssets Liabilities

Cash.........................................................................................................................................................................................................$2,390 Accounts payable....................................................................................................................................................................................$2,650Accounts receivable (net)........................................................................................................................................................................2,390 Deferred revenue..................................................................................................................................................................................... 650Inventories............................................................................................................................................................................................... 1,750 Current liabilities................................................................................................................................................................................3,300

Current assets......................................................................................................................................................................................$6,530 Notes payable...................................................................................................................................................................................... 800Total liabilities....................................................................................................................................................................................4,100

Fixed assets..............................................................................................................................................................................................$6,200 Owner’s equityAccumulated depreciation.......................................................................................................................................................................(3,100) Owner’s equity........................................................................................................................................................................................ 5,530

Total assets..........................................................................................................................................................................................$9,630Total liabilities and owners’ equity..............................................................................................................................................................................$9,630

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e.LUFT CORPORATION

Income StatementSales.........................................................................................................................................................................................................$3,750Cost of goods sold................................................................................................................................................................................... 1,280Gross margin...........................................................................................................................................................................................2,470Wages......................................................................................................................................................................................................730Overhead.................................................................................................................................................................................................900Depreciation............................................................................................................................................................................................ 300Net income..............................................................................................................................................................................................$ 540

Problem 4-4

a.Cash and Equivalents Accounts Receivable

$119,115 $162.500$119,115 $162,500

Store Equipment Merchandise Inventory$215,000 $700,680 $302,990 (1)$215,000 $397,690

Supplies Inventory Prepaid Insurance$15,475 $10,265 (3) $38,250 $4,660 (4)$5,210 $33,590

Selling Expense Sales Salaries$24,900 24,900 (a) $105,750

(6) 3,575 109,325 (b)

Cost of Goods Sold Depreciation Expense(1) $302,990 $302,990 (h) (2) $12,750 $12,750 (i)

Supplies Expense Insurance Expense(3) $10,265 $10,265 (j) (4) $4,660 $4,660 (k)

Accrued Interest Accrued Sales Salaries$3,730 (5) $3,575 (6)$3,730 $3,575

Interest Receivable Interest Income(7) 390 (l) 390 390 (7)

390

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Miscellaneous General Expenses Sales Discounts$31,000 31,000 (c) (d) 6,220 $6,220

Interest Expense Social Security Taxes$9,300 $9, 600 $9,600 (f)

(5) 3,730 $13,030 (e)

Accumulated Depreciation Accounts Payable$37,300 $118,18012,750 (2) $118,180

$50,050

Notes Payable Common Stock$143,000 $300,000$143,000 $300,000

Retained Earnings Sales$122,375 (g) $716,935 $716,935192,585 (m)

$314,960

Profit and Loss(a) 24,900 716, 935 (g)(b) 109,325 390 (l)(c) 31,000(d) 6,220(e) 13,030(f) 9,600(h) 302,990(i) 12,750(j) 10,265(k) 4,660

(m) 192,585

Adjusting entries are:

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

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

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

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

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

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

(7) dr. Interest Receivable.............................................................................................................................................................................$390cr. Interest Income..............................................................................................................................................................................$390

Closing entries are:

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

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

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

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

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

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

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

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

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

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

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

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

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

DINDORF COMPANYIncome Statement for the year ----.

Sales.........................................................................................................................................................................................................$716,935Sales discounts........................................................................................................................................................................................ (6,220)Net sales..................................................................................................................................................................................................710,715Cost of goods sold...................................................................................................................................................................................302,990Depreciation............................................................................................................................................................................................12,750Sales salaries............................................................................................................................................................................................109,325Selling expense........................................................................................................................................................................................24,900Supplies expense.....................................................................................................................................................................................10,265Insurance expense....................................................................................................................................................................................4,660Social Security taxes...............................................................................................................................................................................9,600Miscellaneous general expenses..............................................................................................................................................................31,000Interest expense.......................................................................................................................................................................................13,030Interest income........................................................................................................................................................................................ 390

Net income.................................................................................................................................................................................$192,585

DINDORF COMPANYBalance Sheet as of January 31, ----.

Assets LiabilitiesCash and cash equivalent........................................................................................................................................................................$119,115 Accounts payable....................................................................................................................................................................................$118,180Accounts receivable................................................................................................................................................................................162,500 Accrued interest.......................................................................................................................................................................................3,730Merchandise inventory............................................................................................................................................................................397,690 Accrued sales salaries..............................................................................................................................................................................3,575Supplies inventory...................................................................................................................................................................................5,210 Current liabilities.....................................................................................................................................................................................125,485Prepaid insurance....................................................................................................................................................................................33,590Interest receivable.................................................................................................................................................................................... 390 Notes payable.......................................................................................................................................................................................... 143,000Current assets..........................................................................................................................................................................................718,495 Total liabilities............................................................................................................................................................................268,485

Owners’ EquityStore equipment.......................................................................................................................................................................................215,000 Common stock.........................................................................................................................................................................................300,000Accumulated depreciation....................................................................................................................................................................... (50,050) Retained earnings.................................................................................................................................................................................... 314,960

Total assets.........................................................................................................................................................................................$883,445Total liabilities and owners’ equity..............................................................................................................................................................................$883,445

CasesCase 4 - 1: PC Depot

Note: This case is unchanged from the Twelfth 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....................................................................................................................................................................................................660Accounts Payable................................................................................................................................................................................1,100

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PC DEPOTBalance Sheet as of September 30Assets

Cash.........................................................................................................................................................................................................$84,661Accounts receivable................................................................................................................................................................................11,236Merchandise inventory............................................................................................................................................................................149,300Prepaid insurance....................................................................................................................................................................................2,117Prepaid rent..............................................................................................................................................................................................1,485Furniture and fixtures..............................................................................................................................................................................$17,260

Accumulated depreciation..................................................................................................................................................................( 144) 17,116Total Assets........................................................................................................................................................................................$265,915

Liabilities ant Owners’ EquityAccounts payable....................................................................................................................................................................................$92,571Accrued wages........................................................................................................................................................................................440Bank loan payable...................................................................................................................................................................................100,000Interest payable........................................................................................................................................................................................1,250Proprietor’s capital..................................................................................................................................................................................65,000Retained earnings.................................................................................................................................................................................... 6,654

Total Liabilities and Owners’ Equity.................................................................................................................................................$265,915

PC DEPOTIncome Statement for September

Sales.........................................................................................................................................................................................................$52,850Cost of sales............................................................................................................................................................................................. 38,140

Gross margin......................................................................................................................................................................................14,710Expenses:

Wages............................................................................................................................................................................................$2,063Advertising....................................................................................................................................................................................1,320Office supplies...............................................................................................................................................................................1,100Utilities..........................................................................................................................................................................................501Rent................................................................................................................................................................................................1,485Insurance........................................................................................................................................................................................193Interest...........................................................................................................................................................................................1,250Depreciation.................................................................................................................................................................................. 144 8,056

Net income..............................................................................................................................................................................................$ 6,654

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LEDGERCash Merchandise Inventory

(1) 165,000 (2) 1,485 (3) 137,500 (14) 38,140(9) 38,000 (4) 15,500 (13) 49,940 (11) 3,614 (5) 1,320

(6) 935(7) 1,100 Accounts Payable(8) 275 (12) 96,195 (3) 137,500(12) 96,195 (13) 49,940(15) 688 (19) 226(17) 1,485 (20) 1,100(18) 2,310(20) 660 Accrued Wages

(16) 440Prepaid Insurance

(18) 2,310 (23) 193 Bank Loan Payable(1) 100,000

Furniture and Fixtures(4) 15,500 Proprietor’s Capital(20) 1,760 (1) 65,000

Accounts Receivable(10) 14,850 (11) 3,614 Prepaid Rent

(17) 1,485Rent Expenses

(2) 1,485 Sales(24) 52,850 (9) 38,000

Advertising Expense (10) 14,850(5) 1,320

Cost of SalesWages Expense (14) 38,140

(6) 935(15) 688 Depreciation Expense(16) 440 (21) 144

Office Supplies Expense Accumulated Depreciation(7) 1,100 (21) 144

Utilities Expense Interest Payable(8) 275 (22) 1,250(19) 226

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Insurance ExpenseInterest Expense (23) 193

(22) 1,250Retained Earnings

Income Summary (25) 6,654(25) 6,654 (24) 52,850

(other closing entries not shown here)

Question 4

Other adjusting entries:

(21) Depreciation Expense [($15,500 + $1,760) / 10] / 12.............................................................................................................................144Accumulated Depreciation.................................................................................................................................................................144

(22) Interest Expense ($100,000 x 15%) / 12)................................................................................................................................................1,250Interest Payable...................................................................................................................................................................................1,250

(23) Insurance Expense ($ 2,310 / 12)............................................................................................................................................................193Prepaid 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.........................................................................................................................................................................................................52,850Income Summary................................................................................................................................................................................52,850

(25) Income Summary....................................................................................................................................................................................6,654Retained 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


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 COMPANYBalance Sheet as of February 28

AssetsCurrent assets:.........................................................................................................................................................................................

Cash....................................................................................................................................................................................................$ 88,110Accounts receivable............................................................................................................................................................................127,430Merchandise inventory.......................................................................................................................................................................298,347Supplies inventory..............................................................................................................................................................................3,877Prepaid insurance................................................................................................................................................................................ 5,305

Toted current assets....................................................................................................................................................................... 523,069Plant and Equipment:..............................................................................................................................................................................

Store equipment..................................................................................................................................................................................$ 70,970Less: Accumulated depreciation.........................................................................................................................................................( 21,559) 49,411

Total assets..............................................................................................................................................................................................$572,480Equities

LiabilitiesAccounts payable................................................................................................................................................................................$ 88,970Notes and wages payable....................................................................................................................................................................90,840Interest payable................................................................................................................................................................................... 865

Total liabilities...............................................................................................................................................................................180,675Stockholders’ equity:...............................................................................................................................................................................

Common stock $100,000Retained earnings 291,805 391,805

Total equities...........................................................................................................................................................................................$572,480

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SAVE-MART COMPANYIncome Statement for the Year Ended February 28

Gross sales...............................................................................................................................................................................................$988,700Less: Sales discount 3,340

Net sales..................................................................................................................................................................................................985,360Less: Cost of goods sold.......................................................................................................................................................................... 604,783Gross margin...........................................................................................................................................................................................380,577Less: Expenses

Selling expense...................................................................................................................................................................................$10,880Sales salaries.......................................................................................................................................................................................49,480Miscellaneous general expense..........................................................................................................................................................18,930Interest Expense..................................................................................................................................................................................7,965Social security tax expense.................................................................................................................................................................3,400Depreciation expense..........................................................................................................................................................................10,139Supplies used......................................................................................................................................................................................13,603Insurance expenses.............................................................................................................................................................................7,125Bank services charges.........................................................................................................................................................................750

Total expenses............................................................................................................................................................................... 122,272Net income..............................................................................................................................................................................................$258,305

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SAVE-MARTWorksheet

BalancesFebruary 28 Adjustments

AdjustedBalances

dr. cr. dr. cr. dr. cr.Cash.........................................................................................................................................................................................................88,860 (7) 750 88,110Accounts receivable................................................................................................................................................................................127,430 127,430Merchandise inventory............................................................................................................................................................................903,130 (1) 604,783 298,347Store equipment.......................................................................................................................................................................................70,970 70,970Supplies inventory...................................................................................................................................................................................17,480 (3) 13,603 3,877Prepaid insurance....................................................................................................................................................................................12,430 (4) 7,125 5,305Accumulated depreciation.............................................................................................................................................................................................

11,420 (2) 10,139 21,559

Accounts payable 88,970 88,970Notes and wages payable.....................................................................................................................................................................................................

88,500 (6) 2,340 90,840

Interest payable........................................................................................................................................................................................(5) 865 865Common stock.........................................................................................................................................................................................100,000 100,000Retained earnings....................................................................................................................................................................................33,500 _______ 33,500

594,039 335,734Sales.........................................................................................................................................................................................................988,700 988,700Sales discounts........................................................................................................................................................................................3,340 3,340Selling expense........................................................................................................................................................................................10,880 10,880Sales salaries............................................................................................................................................................................................47,140 (6) 2,340 49,480Miscellaneous general

expense.................................................................................................................................................................................................18,930 18,930Interest expense.......................................................................................................................................................................................7,100 (5) 865 7,965Social security tax...................................................................................................................................................................................3,400 3,400Bank 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 Twelfth 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.

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Journal Entries(1) Cash.........................................................................................................................................................................................................176,450

Sales....................................................................................................................................................................................................176,450(2) Accounts Receivable...............................................................................................................................................................................64,750

Sales....................................................................................................................................................................................................64,750Cash.........................................................................................................................................................................................................64,750

Accounts Receivable...........................................................................................................................................................................64,750(3) Wages and Salaries (expense).................................................................................................................................................................85,750

Cash.....................................................................................................................................................................................................85,750(4) Heat, Light, and Power (expense)...........................................................................................................................................................15,000

Cash.....................................................................................................................................................................................................15,000(5) Supplies Inventory ..................................................................................................................................................................................52,600

Cash.....................................................................................................................................................................................................52,600(6) Selling and Administration (expense).....................................................................................................................................................28,375

Cash.....................................................................................................................................................................................................28,375(7) Interest Expense......................................................................................................................................................................................2,880

Cash.....................................................................................................................................................................................................2,880(8) Bank Loan...............................................................................................................................................................................................12,000

Cash.....................................................................................................................................................................................................12,000(9) Accounts Payable....................................................................................................................................................................................10,400

Cash.....................................................................................................................................................................................................10,400(10) Supplies Inventory...................................................................................................................................................................................9,875

Accounts Payable................................................................................................................................................................................9,875(11) Depreciation Expense..............................................................................................................................................................................15,000

Accumulated Depreciation..................................................................................................................................................................15,000(12) Accounts Receivable...............................................................................................................................................................................11,000

Sales....................................................................................................................................................................................................11,000(13) Cost of Supplies Used.............................................................................................................................................................................60,250

Supplies Inventory...............................................................................................................................................................................60,250(14) Tax Expense............................................................................................................................................................................................11,593

Taxes Payable......................................................................................................................................................................................11,593(15) At this point, the above entries can be posted, and temporary accounts closed to

Income Summary. The final entry closes Income Summary to Retained EarningsIncome Summary....................................................................................................................................................................................33,352

Retained Earnings...............................................................................................................................................................................33,352

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COPIES EXPRESSIncome Statement

For the Year Ended December 31, 2010Sales.........................................................................................................................................................................................................$252,200Operating expenses:................................................................................................................................................................................

Cost of supplies used..........................................................................................................................................................................$60,250Wages and salaries.............................................................................................................................................................................85,750Heat, light, and power........................................................................................................................................................................15,000Selling and administration..................................................................................................................................................................28,375Depreciation....................................................................................................................................................................................... 15,000

Total............................................................................................................................................................................................... 204,375Operating income....................................................................................................................................................................................47,825Interest expense....................................................................................................................................................................................... 2,880Income before taxes.................................................................................................................................................................................44,945Federal income taxes............................................................................................................................................................................... 11,593

Net income..........................................................................................................................................................................................$ 33,352

COPIES EXPRESSBalance Sheet as of December 31, 2010

AssetsCurrent assets..........................................................................................................................................................................................

Cash (2,000 + 241,200 - 207,005)......................................................................................................................................................$ 36,195Accounts receivable............................................................................................................................................................................11,000Supplies inventory (24,400 + 52,600 + 9,875 - 60,250)....................................................................................................................26,625

Total...............................................................................................................................................................................................$ 73,820Property, plant and equipment.................................................................................................................................................................

Building and equipment.....................................................................................................................................................................$300,000Less: Accumulated depreciation.........................................................................................................................................................15,000 285,000Land.................................................................................................................................................................................................... 12,000

Total Assets................................................................................................................................................................................... 297,000$370,820

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Liabilities and Owners’ EquityCurrent liabilities.....................................................................................................................................................................................

Accounts payable (10,400 – 10,400 + 9,875).....................................................................................................................................9,875Taxes payable..................................................................................................................................................................................... 11,593

Total...............................................................................................................................................................................................$ 21,468Long-term debt:.......................................................................................................................................................................................

Bank loan............................................................................................................................................................................................12,000Owners’ equity:.......................................................................................................................................................................................

Capital stock.......................................................................................................................................................................................304,000Retained earnings............................................................................................................................................................................... 33,352

Total........................................................................................................................................................................................... 337,352Total liabilities and owners’ equity.........................................................................................................................................................$370,820

Case 4-4 Waltham Oil and Lube Center, Inc.


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 contributionCash 40,000

Capital 40,000

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2) $40,000 Deposit with NationalDeposit – National 40,000

Cash 40,0003) $6,000 furniture purchase

Furniture 6,000Cash 6,000

4) $10,000 Capital contributionCash 10,000

Capital 10,000

5) $1,200 Insurance payment (12 months)

Prepaid Insurance 1,200Cash 1,200

6) $35,450 deductions from depositOil and grease inventory 6,320Operating supplies and uniforms 4,130Equipment 25,000

Deposit 35,4507) $1500 Lease payment

Lease expense 1,500Deposit 1,500

8) $49,800 Equipment payableEquipment 49,800

Equipment payable 49,8009) $108,600 Bank deposits

Cash 108,600Parking revenue 3,300Services revenue 105,300

10) $8,230 Inventory purchases (oil and grease)Inventory 8,230

Cash 8,23011) $34,560 Payroll payments

Payroll expense 34,560Cash 34,560

12) $1700 Utilities paymentsUtilities expense 1,700

Cash 1,70013) $6,600 miscellaneous payments

Miscellaneous expenses 6,600Cash 6,600

14) $26,400 Lease paymentsLease expense 26,400

Cash 26,40015) $2,490 Equipment payables payments

Equipment payable 2,490Cash 2,490

16) $4,500 Withdrawals (Knight)Withdrawals 4,500

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Cash 4,500

17) $340 Receivable – parkingAccounts receivable 340

Parking Revenues 34018) $730 Receivable – local merchant

Accounts receivable 730Service Revenues 730

19) $2100 Unpaid payrollPayroll expense 2100

Accrued payroll 210020) $350 Unpaid utilities

Utilities expense 350Accrued utilities 350

21) $9,260 Cost of Sales (oil and grease)1

Cost of Sales 9,260Inventory 9260

22) $150 Furniture depreciation2

Depreciation expense 150Accumulated depreciation 150

23) $3,750 Equipment depreciation3

Depreciation expense 3,750Accumulated depreciation 3,750

24) $400 August parking prepaymentsCash 400

Deferred parking revenue 40025) $300 Insurance expense4

Insurance expense 300Prepaid Insurance 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 $ 6,320Purchases 8,230Total Available $14,550Ending Inventory 5,290Cost of Sales $9,260

2 ($6,000/ 10 years) x .25 = $1503 ($75,000/ 5 years) x .25 = $3,7504 $1200 x .25 = $300

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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) 40,0004) 10,000 3) 6,0009) 108,600 5) 1,20024) 400 7) 1,500

10) 8,23011) 34,56012) 1,70013) 6,60014) 26,40015) 2,49016) 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.)

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F) Liabilities

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

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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

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 measurement.)

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chap 004

Documents

bad debt allowance

income statement

complete accounting

credit service

accrued sales

assets liabilities

copies express

statement