AHM Chapter 4 - Solutions

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Chapter 04 - Accounting Records and Systems

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CHAPTER 4
© © All Rights Reserved ACCOUNTING RECORDS AND SYSTEMS

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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.

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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.

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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
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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
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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.

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Waltham Oil Report
and Lube Center involves journalthis
entriesDocument
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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Chapter 04 - Accounting Records and Systems

Problems

Problem 4-1
Cash Accounts Payable
Beg. 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 Payable

Beg. Bal. $3,000 $5,350 (4) (5) $950 $950 Beg. Bal.
(2) 6,350
Bal. $4,000

Inventory
Beg. Bal. $5,700 $4,150 (2)
(1) 2,350
Bal. $3,900

Problem 4-2
1) dr. Prepaid Rent...................................................................................................................................................................
$14,340
cr. Cash..........................................................................................................................................................................
$14,340
Prepaid rent is an asset.

2) dr. Sales Discounts and Allowances.....................................................................................................................................

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

3) dr. Interest Receivable..........................................................................................................................................................

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

4) dr. Depreciation Expense.....................................................................................................................................................

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

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

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Chapter 04 - Accounting Records and Systems

6) dr. Stamp Expense...................................................................................................................................................

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

7) Bad debt expense.....................................................................................................................................................

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

Problem 4-3
a.
1) dr. Inventory......................................................................................................................................................
$1,300
cr. Accounts payable.....................................................................................................................................
$1,300

2) dr. Wages Expense............................................................................................................................................

$730
cr. Cash.........................................................................................................................................................
$730

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

4) dr. Accounts Receivable....................................................................................................................................

$1,810
cr. Sales........................................................................................................................................................
$1,810

5) dr. Overhead and Other Expenses......................................................................................................................

$900
cr. Cash.........................................................................................................................................................
$900

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

7) dr. Accounts Payable.........................................................................................................................................

$1,720
cr. Cash.........................................................................................................................................................
$1,720

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

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

10) dr. Cost of Goods Sold......................................................................................................................................

$1,280
cr. Inventory.................................................................................................................................................
$1,280

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

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Chapter 04 - Accounting Records and Systems

11) Dr. Depreciation Expense..............................................................................................................................................

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

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Chapter 04 - Accounting Records and Systems

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

Problem 4-4
a.
Cash and Equivalents 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

4-5

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Chapter 04 - Accounting Records and Systems

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 $118,180
12,750 (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 $716,935
192,585 (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................................................................................................................................................

$302,990
cr. Merchandise Inventory........................................................................................................................................
$302,990

(2) dr. Depreciation Expense.............................................................................................................................................

$12,750
cr. Accumulated Depreciation..................................................................................................................................
$12,750

(3) dr. Supplies Expense....................................................................................................................................................

$10,265
cr. Supplies Inventory..............................................................................................................................................
$10,265

4-6

Chapter 04 - Accounting Records and Systems

(4) dr. Insurance Expense......................................................................................................................................

$4,660
cr. Prepaid Insurance...................................................................................................................................
$4,660

(5) dr. Interest Expense.........................................................................................................................................

$3,730
cr. Accrued Interest.....................................................................................................................................
$3,730

(6) dr. Sales Salaries.............................................................................................................................................

$3,575
cr. Accrued Sales Salaries...........................................................................................................................
$3,575

(7) dr. Interest Receivable.....................................................................................................................................

$390
cr. Interest Income.......................................................................................................................................
$390

Closing entries are:

(a) dr. Profit and Loss...........................................................................................................................................

$24,900
cr. Selling Expense......................................................................................................................................
$24,900

(b) dr. Profit and Loss...........................................................................................................................................

$109,325
cr. Sales Salaries.........................................................................................................................................
$109,325

(c) dr. Profit and Loss...........................................................................................................................................

$31,000
cr. Miscellaneous General Expenses............................................................................................................
$31,000

(d) dr. Profit and Loss...........................................................................................................................................

$6,220
cr. Sales Discounts......................................................................................................................................
$6,220

(e) dr. Profit and Loss...........................................................................................................................................

$13,030
cr. Interest Expense.....................................................................................................................................
$13,030

(f) dr. Profit and Loss...........................................................................................................................................

$9,600
cr. Social Security Taxes.............................................................................................................................
$9,600

(g) dr. Sales...........................................................................................................................................................

$716,935
cr. Profit and Loss.......................................................................................................................................
$716,935

(h) dr. Profit and Loss...........................................................................................................................................

$302,990
cr. Cost of Goods Sold................................................................................................................................
$302,990

(i) dr. Profit and Loss...........................................................................................................................................

$12,750
cr. Depreciation Expense.............................................................................................................................
$12,750

(j) dr. Profit and Loss...........................................................................................................................................

$10,265
cr. Supplies Expense...................................................................................................................................
$10,265

(k) dr. Profit and Loss...........................................................................................................................................

$4,660
cr. Insurance Expense..................................................................................................................................
$4,660

(l) dr. Interest Income...........................................................................................................................................

$390
cr. Profit and Loss.......................................................................................................................................
$390

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Chapter 04 - Accounting Records and Systems

(m) dr. Profit and Loss........................................................................................................................................................

$192,585
cr. Retained Earnings...............................................................................................................................................
$192,585

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

DINDORF COMPANY
Balance Sheet as of January 31, ----.
Assets Liabilities
Cash and cash equivalent.............................................................................................................................................................
$119,115 Accounts payable................................................................................
$118,180
Accounts receivable.....................................................................................................................................................................
162,500 Accrued interest...................................................................................
3,730
Merchandise inventory.................................................................................................................................................................
397,690 Accrued sales salaries..........................................................................
3,575
Supplies inventory........................................................................................................................................................................
5,210 Current liabilities.................................................................................
125,485
Prepaid insurance.........................................................................................................................................................................
33,590
Interest receivable........................................................................................................................................................................
390 Notes payable......................................................................................
143,000
Current assets...............................................................................................................................................................................
718,495 Total liabilities........................................................................
268,485
Owners’ Equity
Store equipment...........................................................................................................................................................................
215,000 Common stock.....................................................................................
300,000
Accumulated depreciation............................................................................................................................................................
(50,050) Retained earnings................................................................................
314,960
Total liabilities
Total assets..............................................................................................................................................................................
$883,445 and owners’ equity..........................................................................
$883,445

Cases

Case 4- 1: PC Depot
Note: This case is unchanged from the 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.

4-8

Chapter 04 - Accounting Records and Systems

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

Question 2
(These accounts are shown under question 3.)

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

4-9

Chapter 04 - Accounting Records and Systems

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

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

4-10

Chapter 04 - Accounting Records and Systems

LEDGER
Cash 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) 440
Prepaid 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) 1,485
Rent Expenses
(2) 1,485 Sales
(24) 52,850 (9) 38,000
Advertising Expense (10) 14,850
(5) 1,320
Cost of Sales
Wages 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

4-11

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Chapter 04 - Accounting Records and Systems

Insurance Expense
Interest Expense (23) 193
(22) 1,250
Retained 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............................................................................................

144
Accumulated Depreciation...............................................................................................................................
144
(22) Interest Expense ($100,000 x 15%) / 12)..............................................................................................................
1,250
Interest Payable................................................................................................................................................
1,250
(23) Insurance Expense ($ 2,310 / 12)..........................................................................................................................
193
Prepaid Insurance.............................................................................................................................................
193

Postings to the ledger are shown under Question 3. Note that five additional T accounts, not required for
entries (1) - (20), must be created in order to post these adjusting entries.

Question 5
For reasons of space, we shall illustrate only one of the entries closing the temporary accounts, plus the
final closing entry:

(24) Sales.....................................................................................................................................................................
52,850
Income Summary.............................................................................................................................................
52,850
(25) Income Summary.................................................................................................................................................
6,654
Retained Earnings............................................................................................................................................
6,654