anthonyim_04
Post on 20-Jul-2016
6 Views
Preview:
TRANSCRIPT
CHAPTER 4ACCOUNTING 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.
1
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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.
2
©2007 McGraw-Hill/Irwin Chapter 4
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
3
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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
4
©2007 McGraw-Hill/Irwin Chapter 4
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
5
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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
6
©2007 McGraw-Hill/Irwin Chapter 4
(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
7
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
(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 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.
8
©2007 McGraw-Hill/Irwin Chapter 4
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
9
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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
10
©2007 McGraw-Hill/Irwin Chapter 4
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
11
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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
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.
12
©2007 McGraw-Hill/Irwin Chapter 4
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
13
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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
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
14
©2007 McGraw-Hill/Irwin Chapter 4
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.
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
15
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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
COPIES EXPRESSIncome Statement
For the Year Ended December 31, 2006Sales.........................................................................................................................................................................................................$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, 2006
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$370,820
16
©2007 McGraw-Hill/Irwin Chapter 4
Liabilities and Owners’ EquityCurrent liabilities.....................................................................................................................................................................................
Accounts payable (10,400 – 10,400 + 9,875).....................................................................................................................................9,875Taxes payable..................................................................................................................................................................................... 11,593
Total...............................................................................................................................................................................................$ 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.
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 contributionCash 40,000
Capital 40,000
17
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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 1,500Cash 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
Cash 4,500
18
©2007 McGraw-Hill/Irwin Chapter 4
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
19
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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.)
F) Liabilities
20
©2007 McGraw-Hill/Irwin Chapter 4
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
Accounting: Text and Cases 12e – Instructor’s Manual Anthony/Hawkins/Merchant
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.)
22
top related