Chapter 04 - Accounting Records and Systems

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

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

4-1

Chapter 04 - Accounting Records and Systems

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

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

(3)

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

Beg. Bal.
(1)
Bal.

(5)

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

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

Problem 4-2

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

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

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

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

5) dr. Cash..................................................................................................................................................................................
$2,730
cr. Deferred revenue.........................................................................................................................................................
$2,730
Deferred revenue is a liability.
4-2

.......................................................................................................................... Cash..................... Cash........................................ Accounts Payable............................810 5) dr.....300 cr.....................................940 4) dr................................................................................................................................................................................................................................................ $1. $1.......................... Cash........................... $730 3) dr...720 cr.................. Wages Expense $730 .................................................720 8) dr..................................................................................... Note Payable................................... $1..810 cr.................................................................................... Cash........ Inventory............. Allowance for doubtful accounts is a contra asset displayed as a deduction from the asset accounts receivable........... $1................................................................................................................Chapter 04 ................................................................................................................................................................................................... $650 9) dr................... $200 10) dr................ Inventory.......... $1........................................................................................................................................................... Accounts Receivable......................................................................................................Accounting Records and Systems 6) dr.................................. $1................................ $1............. $1............................................................................... $1............................................................................................................................................... $3. Sales........... $1.................... $200 cr..... 1.................................................... Deferred Revenue....................................................................................................................................................... Stamp inventory is an asset...............300 2) dr............................... $1................................................................. $900 6) dr........280 + Beginning inventory................................................................................................................................................................. Cash..........................................................................510 cr...........................350 Bad debt expense account is an expense account...........................................730 Additions............................ Cash................................. Sales................... .............................................................750 4-3 ... Stamp Expense......................................030 Ending inventory 1.. $1............................................................... 1) dr.....................................................................................................................................................................................................................300 Total available............................................................ Accounts Receivable................................................................ Problem 4-3 a........................................................................................... $172 Stamps expense is an income statement item............................................510 7) dr............. Accounts payable............................................................................................. $1....................................................940 cr............................................................................................................................................................................................................... Overhead and Other Expenses................................................................................ $1............................................................................................................................................................................................................ 7) Bad debt expense.... $72 cr............................................................................ $900 cr................................. Cost of Goods Sold........................... Cash....280 cr............... cr........................................................................................350 Allowance for doubtful accounts...................... $650 cr....................... Cash........ $1........................ $100 Stamp Inventory..................................................................................................................

... $1....................................................... Cost of goods sold.................................................................... ................Chapter 04 .........280 4-4 ..............Accounting Records and Systems .......................................................................................................................................................................................................................

..... $2..........................................................................................................................................940 900 (5) 1......510 (6) (4) 1....390 Deferred revenue................. 3........................................................................280 1............................................................................... $6..........530 Notes payable..............................................................200 Owner’s equity Accumulated depreciation (3...............300 Current assets................280 (10) 1...............730 $1.................................................940 Sales (3) COGS 1.................100 Fixed assets..... $300 Cr.....................390 Accounts payable............................................440 $ 730 (2) 1......300 Allowance for Doubtful Accounts $70 Fixed Assets (cost) $6.......................Accounting Records and Systems 11) Dr....................................................................... 4..................530 ...... 5................................ $6................................................................070 1....................................... 2............................. 800 Total liabilities..... $9...........200 Notes Payable $600 200 (9) Owners’ Equity $7308 Wages $4......................810 Accumulated Depreciation $2...........................................990 Overhead 900 1.....................................................................................................................720 $3.................................................................. 1................................................... 650 Inventories..............510 1....... Accumulated Depreciation.............................................................................720 (7) 650 200 (1) Inventories $1..................810 Sales (4) Depreciation 300 Deferred Revenue $650 (8) See above d.............. $9........................... $300 b..........................................................800 300 (11) (2) (5) (10) (11) (3) (1) (8) (9) Cash $1..................................650 Accounts receivable (net)..630 and owners’ equity..............................................100) Owner’s equity..................................................................................... ............................................... LUFT CORPORATION Balance Sheet Assets Liabilities Cash.................160 1............. Total liabilities Total assets.................................................................................................................................300 (1) Accounts Receivable $2.............................................630 4-5 ........................................................750 Current liabilities. Depreciation Expense.................... $2................................Chapter 04 ........... (1) Accounts Payable $1........................

Accounting Records and Systems 4-6 .Chapter 04 .

.............................000 $215..........................900 24.....................750 Cost of goods sold.................500 Store Equipment $215...........................500 $162.......990 $302..590 Selling Expense $24........................................................325 (b) Depreciation Expense (2) $12............. Cash and Equivalents $119.990 $397...... 2.......660 (4) $33.750 (i) Supplies Expense $10...........000 Merchandise Inventory $700..265 $10.......265 (3) $5.........690 Supplies Inventory $15...................680 $302............. $3...900 (a) (6) (1) (3) Cost of Goods Sold $302..................... $ 540 Problem 4-4 a................................ 1..................730 (7) (1) Insurance Expense $4... 300 Net income................................660 $4........................................730 (5) $3.....Chapter 04 ...........575 Interest Receivable 390 390 (l) 4-7 Interest Income 390 390 (7) .....750 3..................................470 Wages......575 109..............................575 (6) $3..........990 (h) Sales Salaries $105...475 $10.......750 $12................................................................................................................................................................. 900 Depreciation...........660 (k) Accrued Sales Salaries $3........250 $4..265 (j) (4) Accrued Interest $3......210 Prepaid Insurance $38..........................115 $119..................... LUFT CORPORATION Income Statement Sales...........115 Accounts Receivable $162..............................................................................................280 Gross margin...........................Accounting Records and Systems e.................................. 730 Overhead..................

.........000 6....660 192............................ $10.750 (2) $50...................................180 $118...000 $143........................................................ ............... Supplies Expense.... Merchandise Inventory..........................000 Common Stock $300. Cost Of Goods Sold $302..................730 $13........030 9.... 935 (g) 109...220 13....................................................................................................................000 31............Chapter 04 .......750 10............900 716..........000 $300..................................... $12........375 192.......................... $12..........................................000 (c) (5) (d) Interest Expense $9.....................265 cr.....750 (3) dr..935 Profit and Loss 24.......030 (e) Social Security Taxes $9......990 (2) dr...300 12.................960 (a) (b) (c) (d) (e) (f) (h) (i) (j) (k) (m) Sales Discounts 6..300 3... $302...000 Retained Earnings $122............... $10..585 Adjusting entries are: (1) dr... Depreciation Expense...600 (f) Accumulated Depreciation $37.220 (g) Sales $716.935 $716............750 cr............................................................................ 600 $9...............................180 Notes Payable $143.........050 Accounts Payable $118............................................... Accumulated Depreciation........................265 4....................................................... Supplies Inventory......... cr..............990 ........265 4-8 ............................................325 390 (l) 31................................................Accounting Records and Systems Miscellaneous General Expenses $31...990 12...........585 (m) $314.......................220 $6...................................600 302...

Chapter 04 .Accounting Records and Systems 4-9 .

..................................................................... Sales Salaries........................................ Profit and Loss................... $302........... $4.................................................. Insurance Expense............................................. Insurance Expense..............................................220 cr......................................................... $109............. $302...... Profit and Loss................................................................................................................................................................................................................... Sales Discounts................. $24.... $12..................................660 (5) dr.......................................... $10.................................................................................................................................................. $390 cr.............. $4................ $390 cr................................................................ $3............................................................................................................................................. $109...................................................................................... Profit and Loss................................ Accrued Sales Salaries.......................... Social Security Taxes............................... $390 4-10 ......................................................................................................265 (k) dr.......................................................................600 (g) dr......................................................................730 (6) dr..................... Cost of Goods Sold..............Accounting Records and Systems (4) dr..........................................990 cr.................................... Sales Salaries............................................................................... Interest Receivable... $24........................................................................................... Profit and Loss................................................ $6.................................................................................................................... $10....................... Prepaid Insurance...900 (b) dr................. $3................................................................................................................................ $13...............575 (7) dr...................................................... $716............................................................... $9.......................... $4.............................................................................. Profit and Loss.....................................................................................................................................................................................................................................030 (f) dr...............................000 (d) dr..................... Sales...................................................... $31........................................................................................................................ Profit and Loss....................................................................................................................... Supplies Expense.......... $13.........................220 (e) dr...... Accrued Interest....... $9............................................. Profit and Loss............... Interest Income........................................................................................... $12............................................................................................................................................................................... $390 Closing entries are: (a) dr............................................................................................................................... $3......................Chapter 04 ................................................................................................................730 cr............................................................................... Selling Expense........ Profit and Loss................935 cr................ Miscellaneous General Expenses.. Interest Expense.. Interest Expense........................750 (j) dr............................. $3....000 cr............................................................ Profit and Loss........................................................575 cr.......................... Depreciation Expense.............................................................................................................................................660 cr..........................................................................................................................................750 cr...................935 (h) dr..................................................................................................................600 cr.......... Profit and Loss.... $31...............................660 (l) dr........................... Profit and Loss...325 (c) dr........................................................265 cr........... $4.........................325 cr...................................030 cr...........990 (i) dr.............900 cr.................................................................................. Profit and Loss..................................... $6.............................................................................. Interest Income...........................................................660 cr........................... $716...................................................................

................................730 Merchandise inventory.......................................................................485 Owners’ Equity Store equipment..................... 3.........................................................................................Accounting Records and Systems (m) dr......................... 33............................................................................... 300.................................................................500 Accrued interest.. 125.................................................................................................... $716.. 3...........030 Interest income...................................................................................................................... . (6..585 DINDORF COMPANY Balance Sheet as of January 31................................................... Current assets..................................... $192..........................................................................................000 Accumulated depreciation.. 390 Notes payable 143.......................................................................................585 cr.........................................................575 Supplies inventory..................................Chapter 04 ................................................................115 Accounts payable............................................900 Supplies expense..........................................................................................................................................................................................................................................750 Sales salaries....................000 ........................................................................ 24...................................................935 Sales discounts.................................................................................................................... Retained Earnings.........660 Social Security taxes....................................................... Sales.................................................................................................................................000 Common stock............585 DINDORF COMPANY Income Statement for the year ----..............000 Interest expense................... 4............................................ 390 Net income.................................................. 12............................................................................ 268........... $192.......................715 Cost of goods sold.... $883.................................................. Assets Liabilities Cash and cash equivalent.......................................................................220) Net sales......................................................................... 718...............485 Prepaid insurance................................................................................................960 Total liabilities Total assets.............................................. 710.................................495 Total liabilities............................................................................................................................. 215....................................................445 Cases Case 4.................................................................................................................................................................................................................................................... 31... 4-11 .......990 Depreciation.........................180 Accounts receivable.......................................................................................................................................................................................................................... ----..............................................................................................................................................................................................................................................................................................................................................690 Accrued sales salaries........... 10............590 Interest receivable......................................... $883................................................................................................................... 9............. 302..............................................................................................445 and owners’ equity..............1: PC Depot Note: This case is unchanged from the Twelfth Edition... 5........................................................................................................................................ $119........................... $192.......................................................................................................................210 Current liabilities..... 314.................................................................................................... (50... 109..........................................265 Insurance expense......325 Selling expense....... $118.................................................. Profit and Loss.................................050) Retained earnings.......................................................... 397.... 13........................ 162..........................................600 Miscellaneous general expenses................................................................................

Chapter 04 . Students usually need such a simple problem to build up their confidence in journalizing and posting transactions. 4-12 .Accounting Records and Systems Approach This is a way of easing gently into the debit-credit mechanism and the complete accounting cycle.

................................................................................................................................. 660 Accounts Payable........................................................................000 borrowed from the bank.................................................................................................. 38........ 49......195 Cash.............................................................................................................................................................................................................................. 440 (17) Prepaid Rent.................. 96................................................................................................................................................................................................................... 2..........310 (19) Utilities Expense................................................... 226 (20) Furniture and Fixtures......................................................... 688 Cash.......................................................... 49......................... 688 (16) Wages Expense.................100 4-13 ...........................................................................................................................................................000 (10) Accounts Receivable.............................................310 Cash..940 (14) Cost of Sales... 2........................................................................................................................... 38............................................................................................................................................. 440 Accrued Wages.....760 Cash............................................................................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....................................................................................195 (13) Merchandise Inventory...................................... 14......................................................................................................................................................................... 1................................................................................................... 14.................................................................................140 Merchandise Inventory.......................................................................................................................................................................... 1..485 (18) Prepaid Insurance.... so her initial cash balance was $165.......................................................................................................................................” Question 2 (These accounts are shown under question 3.......000 Sales........................................................... 3..................................614 (12) Accounts Payable.........................) Question 3 General Journal (cont’d) (9) Cash..............................................................................................485 Cash........................850 Sales....... 226 Accounts Payable........................................850 (11) Cash............................................................................................................................................000..........................Chapter 04 ........................................................................614 Accounts Receivable....... 38..................................................................................................................140 (15) Wages Expense...................................... 38......................................... 96...............................................................................................................................................................940 Accounts Payable............................... 1................................................ 1.....................................................................................................................................................................................................................................000 of her own money and $100...................................................................................................................................................................................... 3...

........................................................................................................... ..................................485 Insurance............................320 Office supplies.. $84...................................................................................................................................................................000 Retained earnings 6.................................................................................................................................................................................................................................................................................................. $265......................... 1......................................................571 Accrued wages...............................................................................................................................................250 Proprietor’s capital......................................................................................................................................................... $2..............661 Accounts receivable.................................................................Accounting Records and Systems PC DEPOT Balance Sheet as of September 30 Assets Cash..................................................................................................................................................................................................................915 PC DEPOT Income Statement for September Sales.....................................850 Cost of sales................................................................................................................................ $ 6................................................................................................................................................................................................300 Prepaid insurance.........................................000 Interest payable......................................................100 Utilities....................................................................915 Liabilities ant Owners’ Equity Accounts payable...................................... 11....................................................236 Merchandise inventory...........Chapter 04 ...................260 Accumulated depreciation................................................... 65............................................................................................................................................................................................................................................................ $92...........................................056 ......................................................................... Net income......................... .......485 Furniture and fixtures................................................................................. Total Liabilities and Owners’ Equity...................................................................................................250 Depreciation 144 8..................117 Prepaid rent.............................................................................................................................................................................. 1.......................................................................................................................... 14...................................................................... 1.........116 Total Assets....140 Gross margin............................................................................................................................ $52........................................... 38........................................................................ $17................................................................................................................................................ 2............................................................................................................................710 Expenses: Wages. 440 Bank loan payable........................................................................ 1...................................................................................................................................... 1.................................. 149............................................................................................................................................................................................ 193 Interest.......................................................................................................................................... ( 144) 17................................................................................................................................................................................................................................................ $265.......................................................................................................................................................... 501 Rent........................................................................................................................ ...063 Advertising... 100........................654 ...................................................................................................654 4-14 ............................................................................................................................................................................................................................................................................................................ 1.............................................................

500 49.000 (4) 3.850 (11) 1.940 226 1.614 Rent Expenses 1.000 14.100 440 Bank Loan Payable (1) 100.195 688 1.500 1.000 Prepaid Rent 1.000 (2) 38.940 Advertising Expense 1.485 15.140 38.485 Sales 52.760 (10) Accounts Receivable 14.195 (3) (13) (19) (20) Accrued Wages (16) (17) (2) Merchandise Inventory 137.850 (9) (10) (14) Cost of Sales 38.500 1.310 (23) (4) (20) Furniture and Fixtures 15.614 (5) (6) (7) (8) (12) (15) (17) (18) (20) (18) Prepaid Insurance 2.320 137.485 (24) (5) Accounts Payable 96.Chapter 04 .485 2.Accounting Records and Systems LEDGER (1) (9) (11) Cash 165.000 Proprietor’s Capital (1) 65.850 144 1.250 .100 Accumulated Depreciation (21) (8) (19) Utilities Expense 275 226 Interest Payable (22) 4-15 38.100 275 96.500 (14) 49.140 (21) Depreciation Expense 144 (6) (15) (16) Wages Expense 935 688 440 (7) Office Supplies Expense 1.320 935 1.310 660 (3) (13) (12) 193 3.

........................... 144 Interest Expense ($100..........Chapter 04 .......................................................................500 + $1..................................................................................................................................... 6..................................................................................................... 4-16 .......850 (other closing entries not shown here) (25) Insurance Expense 193 6......................250 Insurance Expense ($ 2................... 52....... this has not been done in the accompanying solution.......................................................................................(20)..................... plus the final closing entry: (24) Sales..................... must be created in order to post these adjusting entries.............................................. 1........................... 1............ 6........................................760) / 10] / 12..............................................................850 (25) Income Summary...................310 / 12)........................... not required for entries (1) ............................ 144 Accumulated Depreciation.............................000 x 15%) / 12)...........................654 Question 4 Other adjusting entries: (21) (22) (23) Depreciation Expense [($15....850 Income Summary..............................2: Save-Mart Note: This case is unchanged from the Twelfth Edition............................ Case 4....................................................................................654 Retained Earnings........................ Note that five additional T accounts.... 193 Prepaid Insurance...........................................250 (22) (23) Retained Earnings (25) Income Summary 6..............250 Interest Payable.654 Note that two more T accounts have been created for the closing process........................................................................ Question 5 For reasons of space................ Question 6 The statements appear above........................Accounting Records and Systems Interest Expense 1...... Approach This is a straightforward problem in making adjusting and closing entries....... 52....................... we shall illustrate only one of the entries closing the temporary accounts......................................................654 (24) 52..................................................................................... Students may raise the possibility of recording social security taxes on accrued sales salaries.. 193 Postings to the ledger are shown under Question 3............

..............................................................................................................................................................................805 391................................................................................................................................................................................................................................ Store equipment..........................000 Retained earnings 291.........................877 Prepaid insurance.......305 Toted current assets....................................................... $ 88................................................................................................................................347 Supplies inventory..........................................................................................430 Merchandise inventory.......970 Notes and wages payable........................................................................ $572............................................................................Chapter 04 ....................... ( 21........................................675 Stockholders’ equity:............................................. Common stock $100.........................................................................069 Plant and Equipment:..................................................... 523................................................................................................................................................................................................................................................ $572......110 Accounts receivable.559) 49..........480 Equities Liabilities Accounts payable.................................................................................................................................. 127..................................................................... (Because only one entry per account is involved...... even though the students were asked to use T-accounts.........970 Less: Accumulated depreciation.................................. $ 88........................................... 5.........................840 Interest payable....................... $ 70........................411 Total assets.................................................... 865 Total liabilities.................) The financial statements for Question 4 are shown below................................................ 90.......................................................................................................Accounting Records and Systems Questions 1-4 The journal entries and accounts for Questions 1-3 are as indicated on the worksheet that follows................................................................... Cash............................................................................................... SAVE-MART COMPANY Balance Sheet as of February 28 Assets Current assets:............................................... 298.............................................................................................................................................................480 4-17 .................................... 3.....................805 Total equities.................................................................................... 180..................................................................................................................................................................... to save space we have used a worksheet here...........

.........................................................................................................340 Net sales....................................................................577 Less: Expenses Selling expense...................................... 985..........................272 ..........................................................................................................................................................................................................360 Less: Cost of goods sold.................................................................................... 13.................................. 3........................................700 Less: Sales discount 3.139 Supplies used................................400 Depreciation expense.................................................. Net income................................................................................................................................................................................................................................................................. $988...........880 Sales salaries................................. 18.................. $10.............................................................................480 Miscellaneous general expense..............125 Bank services charges................................................................................................................................................................................................................................................................................................................................................................................................................. 10............Accounting Records and Systems SAVE-MART COMPANY Income Statement for the Year Ended February 28 Gross sales.................................................................................................................................................................................................................................930 Interest Expense.................................................................................................................................................... 7................................................... 604.................................................................................................................................................................................................................... ...................................................... 49..............................................Chapter 04 ...................................................................................................................................... $258........783 Gross margin..................................................965 Social security tax expense.................................... 750 Total expenses 122............................... 7..................................................................603 Insurance expenses.................................................. 380.................305 4-18 ...........................................

...........480 Miscellaneous general expense.................................................................................................................. 33...............................100 (5) 865 7.............305 Accumulated 11...............340 90..................................... dr........................................................................................................................880 10............................................... 903.......... 47.......................................................................................................................970 70........................................ 3....................................400 Bank service charges...................... 7....... (5) 865 865 Common stock. 18................................ cr.............................880 Sales salaries................................... dr.500 (6) 2..................................................................................................................000 100...........................................................................................................................................................................................................039 335........................................................559 depreciation..................... 10................................................................................................................500 _______ 33.......347 Store equipment........................... 17..............................................860 (7) 750 88..............................................................................................................340 49...............................783 298........................ cr.................... 988.....................139 21............................................................................................................... 127..................970 Notes and wages 88..................125 5.430 127.........................................930 18................................430 Merchandise inventory.................................................................................................................................. Accounts payable 88......................................................................................965 Social security tax.................480 (3) 13.............340 3....................................... 70..................734 Sales................................................................................................... cr..............840 payable...................400 3........................Chapter 04 .......................420 (2) 10........................................................................700 988............603 3.................................................................930 Interest expense.............877 Prepaid insurance..................................................................................................................................................... (7) 750 750 4-19 ...........................Accounting Records and Systems SAVE-MART Worksheet Balances Adjusted February 28 Adjustments Balances dr.............................................. 12............................................................430 (4) 7..................................... 88.......110 Accounts receivable.............. 3......970 Supplies inventory.........................................................................140 (6) 2........................................ Interest payable.......970 88...............................700 Sales discounts.....................................................................................................130 (1) 604..............................................................................000 Retained earnings...................500 594..................340 Selling expense............. Cash........................................... 100...

a portion of utilities)..... including wages. Rather.........603 13................................................ (3) 13..................324.....................3: Copies Express Note: This case is updated from the Twelfth Edition............................311........................ and which are definitely period expenses (e.................................................................Chapter 04 .......................... Actually..605 1..434 0 Case 4....................125 ________ _ _ 1.....783 604......324.. (2) 10................................g.. The transactions and financial statements follow................311........................................ supplies....605 639........... 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........................... Approach This is a straightforward complete cycle accounting problem.....434 1................................. Some students may develop a cost of sales amount...........................................139 Supplies expense....139 10................... 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...........................125 ______ 7.............. as they are making good efforts to incorporate important concepts despite the limitations in the data presented......... (1) 604........ These students’ efforts should not be discouraged at this point..... _______ ________ (4) 7.............. 4-20 ...........603 Insurance expense...............783 Depreciation......09 1............................ and perhaps some other items..... assuming one could be developed with some elaboration of the chart of accounts....Accounting Records and Systems Cost of goods sold................................090 639..................................

..............................................Accounting Records and Systems (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14) (15) Journal Entries Cash.. 64.......... 85....................... 52...................................................................000 Cash........................875 Accounts Payable.......875 Depreciation Expense............................................................................................................................... 33.... 176................................................................................................................................................................................000 Sales........................................................................593 Taxes Payable.................................................................... 33.............000 Supplies Inventory ....................................... 11..............................................................................................................................................................................352 Retained Earnings........... 11......................................................................................................................................................................................................................................................................................................................................................375 Cash........352 4-21 ......................................................................................................... 64.......................................................................................750 Wages and Salaries (expense)................................................... 28.................................................................................................................................................................................................................................................................................................................450 Sales...................... 11...........................750 Cash.......................................................................Chapter 04 .................................................................................................................... 15............................................................................................. 2.................600 Selling and Administration (expense).................................... 2........................ and temporary accounts closed to Income Summary............................................................................................... 10.................000 Accumulated Depreciation......................................000 Accounts Receivable...................... 64..........................................................450 Accounts Receivable....................... The final entry closes Income Summary to Retained Earnings Income Summary..................................................880 Bank Loan........................................................................... the above entries can be posted.................................................... 10...... 15............................ 12................................................................................................................................................... 60........................................................................................ 64...................................................................................000 Cost of Supplies Used....880 Cash..........................................................................................750 Sales.................................................................................................................... 9...................................................................................... and Power (expense).......................................................................400 Cash.........................375 Interest Expense...............................000 Accounts Payable.................250 Supplies Inventory....750 Heat............................................. 28....................... 176..........................................................................................600 Cash...................................................................... 60....................................... 52................................750 Cash................................................................ 12..........750 Accounts Receivable......................................................................................593 At this point............................................ Light...... 15..........000 Cash............................................................................. 85..................................................................................................................................................................................................................................................................................................................................................................................400 Supplies Inventory.......................250 Tax Expense.................. 15............................................................................................................................. 9.............................................................................................................................................................................. 11.........................................................................................................................

.... 204......................................................................................................................................352 COPIES EXPRESS Balance Sheet as of December 31..................625 Total................................ Building and equipment...............60...............................................000 Less: Accumulated depreciation....................000 Selling and administration........... 15................................ 12...................................................................................750 Heat......................................... 2010 Sales........................................................................................................................250).................................................... $ 36........................ 44. 15.................................................................................................................................................................. $300............................................. $252............................................................................................................................................................................................................................................................................................................ 26..................................................................................................................................................................... light................820 4-22 ................................................................................................................................................................. 2...................................200 Operating expenses:............945 Federal income taxes.....................................................000 Total........................000 Total Assets.......................... 47........................195 Accounts receivable................................................................................................................................... 28............................................................ $60.........................................................................................................................................................................................................000 Land....................................................400 + 52.................... plant and equipment.................................820 Property........................................................................................................................................................................................................... $ 33.............................................Accounting Records and Systems COPIES EXPRESS Income Statement For the Year Ended December 31..............................................................................................................................................................................................................593 Net income.... 2010 Assets Current assets.......................................................................................Chapter 04 ............................................................................................250 Wages and salaries....825 Interest expense.................. Cost of supplies used......................................................................... 11.......200 .................005)........................................ 15.............................................................000 + 241..............................375 Operating income................................................................................... 11.................. 297.................................207........... $ 73...000 285..................................................................875 ................................................................... Cash (2.......................................................................000 Supplies inventory (24............................................375 Depreciation....................600 + 9....................................... and power....................................................................880 Income before taxes..........000 $370................................................................................................................................................................................................ 85.....................................................

.. The case asks students to prepare the journal entries for a new business’ initial three months of operations.............593 Total............... Since students in the early stages of the course (up through Chapter 4) may have trouble with this challenging assignment................................................................ Some instructors use the case to discuss the complete accounting cycle.. Bank loan...... derive directly from the journal entries certain end of the period account balances..................... The journal entry requirement is straightforward............................................................................................................................................ $370.................................................................. 304....................352 Total liabilities and owners’ equity........................................................... the instructor must assign the questions for this assignment...............352 Total................ Capital stock................................................400 – 10...............................................820 Case 4-4 Waltham Oil and Lube Center.....................000 Capital contribution Cash Capital 40............000 40..000 Owners’ equity:................ the case includes several additional actual and potential transactions that will generate class discussion as to the correct way to account for the transaction.................................................................................................................................... 33....................................................... 11........................ Note: This case is unchanged from the Twelfth Edition..................... instructors using the case for a discussion of the full accounting cycle usually assign the case later in the course (Chapter 5 onwards................. If the case is used for this purpose........................................................................................................................................................................ and comment on several accounting policy decisions facing the management. Finally...................................................................................................................... This latter discussion and the account balance discussion can be combined...............................................400 + 9.............................................................................................................. Accounts payable (10.... 12... but some students may find it somewhat difficult because the entries must be prepared using a case format rather than a problem format................................. 337................ $ 21............468 Long-term debt:..........................000 Retained earnings....................................................) Question 1 The journal entries are: 1) $40.........................................................Accounting Records and Systems Liabilities and Owners’ Equity Current liabilities..875 Taxes payable.............. 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 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...........................................875)...................................................000 4-23 ..............Chapter 04 .................................. Inc. 9.............................

Accounting Records and Systems 2) $40.600 Bank deposits Cash Parking revenue Services revenue 10) $8.400 Lease payments Lease expense Cash 15) $2.000 furniture purchase Furniture Cash 4) $10.500 1.000 10.450 1.600 3.000 10.700 1.130 25.200 1.000 Capital contribution Cash Capital 40.800 108.300 105.560 34.300 8.800 Equipment payable Equipment Equipment payable 9) $108.450 deductions from deposit Oil and grease inventory Operating supplies and uniforms Equipment Deposit 7) $1500 Lease payment Lease expense Deposit 8) $49.000 35.Chapter 04 .230 8.600 miscellaneous payments Miscellaneous expenses Cash 14) $26.000 40.500 Withdrawals (Knight) Withdrawals 1.230 Inventory purchases (oil and grease) Inventory Cash 11) $34.600 26.600 6.000 6.560 Payroll payments Payroll expense Cash 12) $1700 Utilities payments Utilities expense Cash 13) $6.400 26.200 6.490 Equipment payables payments Equipment payable Cash 16) $4.500 49.000 Deposit with National Deposit – National Cash 3) $6.700 6.490 2.200 Insurance payment (12 months) Prepaid Insurance Cash 6) $35.800 49.320 4.400 2.000 5) $1.000 6.490 4.560 1.230 34.500 4-24 .

750 Equipment depreciation3 Depreciation expense Accumulated depreciation 24) $400 August parking prepayments Cash Deferred parking revenue 25) $300 Insurance expense4 Insurance expense Prepaid Insurance 340 340 730 730 2100 2100 350 350 9.260 2 ($6. 1 Beginning Inventory $ 6.750 3.750 4 $1200 x . Similarly.260 Cost of Sales (oil and grease)1 Cost of Sales Inventory 22) $150 Furniture depreciation2 Depreciation expense Accumulated depreciation 23) $3.000. the capital account is kept separate from retained earnings to show how much the owners have contributed to the business.550 Ending Inventory 5.230 Total Available $14.320 Purchases 8.Accounting Records and Systems Cash 4.25 = $3.290 Cost of Sales $9. 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.000/ 10 years) x .25 = $150 ($75.25 = $300 3 4-25 .750 400 400 300 300 Question 2 A) Capital Knight has made two capital contributions ($40. Some students may want to include retained earnings in their capital amount.000.Chapter 04 .500 17) $340 Receivable – parking Accounts receivable Parking Revenues 18) $730 Receivable – local merchant Accounts receivable Service Revenues 19) $2100 Unpaid payroll Payroll expense Accrued payroll 20) $350 Unpaid utilities Utilities expense Accrued utilities 21) $9.260 9260 150 150 3.000/ 5 years) x .) The total is $50.000 and $10.

) Students should be asked why was the insurance payment was not expensed on May 1.500 Balance 25. Statement users want to know the cost of the assets being used and the extent to which they have been depreciated.000 9) 108. The balance is $900 ($1200 .750.) C) Prepaid Asset The only prepaid asset is prepaid insurance.) One-quarter of the insurance coverage benefit has expired ($1200 x . Some students might argue the $400 prepaid parking checks do not belong in the July 31 cash balance.) 4-26 . the bad debt issue can be discussed. The answer is it met the definition of an asset (future economic benefits) and its expiration accounting is influenced by the matching concept.) The balance is $3.560 12) 1. The accounts receivable balance is $1070. Students should be encouraged to explain why depreciable assets are reported at cost with the accumulated depreciation account shown as a contra asset account. D) Cash balance The cash T account is (Journal entry indicated) Cash 1) 40. Statement users can use their data to estimate the average age of a depreciable asset (accumulated depreciation / annual straight-line depreciation expense.$300. E) Accounts Receivable Waltham Center is owed $340 by overnight parkers and $730 by local merchants.200 24) 400 7) 1. The case is deliberately vague on this point.500 10) 8.Accounting Records and Systems B) Accumulated depreciation The accumulated depreciation account is the sum of two amounts ($150 and $3.700 13) 6.000 2) 40.820 The cash balance is $25.Chapter 04 .25.000 4) 10. In their view the payment was not received until after that date.000 3) 6.490 16) 4.600 5) 1.820. The instructor can use this vagueness to raise the question as to the significance of “cut off” dates. 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. Here or later in the class.900.600 14) 26.230 11) 34.400 15) 2.

the instructor is well advised not to raise it.Accounting Records and Systems F) Liabilities There are three liabilities at the end of the three month operating period. Some advanced students may challenge the liability total.300 cash received plus $340 owed. he might account for the withdrawals as “wages.) Some students will forget the prepaid May rental. The interesting question is how should Knight view his withdrawals in his assessment of the progress of his business to date. The class is not ready at this time for a present value-type discussion. The prepayment has not been earned (it has been realized.000 June – July flat rental paid plus $23. he might regard the withdrawals as “dividends. Other students may want to include the $400 prepaid August parking.” On the other hand.960 current maturity of equipment payable [$830 + 12 = $9.Chapter 04 .500 withdrawal a dividend? Wages? If Knight is trying to assess how well his business has done.) It is a deferred revenue item (a liability.760. This would be an error.310. The instructor should use the discussion to review the distinction between current and non current balance sheet accounts.960]). b) Cost of Sales See note to cost of sales journal entry. Accounting does not work that way.100 + 350 + 9. Is the $4. They may want to impute an interest charge on the “non interest bearing note.410 ($12. The third is the longer term obligation for the equipment ($47.” In either case the instructor might consider including the opportunity cost of wages foregone by not working elsewhere. c) Parking revenues The amount is $3. This discussion gives the instructor an opportunity to discuss how a prepaid expense becomes an expense.100 and accrued utilities $350. During the liability discussion the instructor should ask what is the current liability balance? The correct answer is $12.” If students do not raise this issue. Two are the current liabilities accrued payroll $2. The two accrued liabilities mentioned above plus the current maturity on the long-term obligation.) The liability account balance is $49.900 (May $1500 prepaid flat rental plus $3.640 ($3.400 per car $10 payments. It reports provisions for bad debts as an expense item.410 = $2. if he is trying to answer how much he has earned on his investment. e) Total Revenues 4-27 . Question 2 a) Withdrawals The amount of the withdrawals is not the interesting question.) Some students may want to deduct a bad debt provision from gross revenues.) d) Lease Expenses The total amount is $27.

if the amount is material. (Technically. Question 4 Some instructors use the revenue and bad debts discussion here and above as a lead into or part of their Chapter 5 assignments. Some students may forget the credit service sales.670.) Measurement at cost reflects the replacement cost value of the asset transferred to the owners. On the other hand.) The amount is $109.) The amount is not measured at retail (accounting does not recognize opportunity costs.Accounting Records and Systems Total revenues is the sum of parking revenues ($3.) See discussion above.) It is not a revenue (not realized. A provision for bad debt might be considered. Is the family use revenue? A cost? A withdrawal? Measured at retail? Measured at cost? Worth worrying about? Accounting. Also. treats the family use as a withdrawal measured at cost. any bad debt allowance might not be material enough to warrant accounting recognition of a bad debt allowance. In this way the profitability of each activity can be assessed.Chapter 04 . The service and rental revenues should be reported separately. small businesses have a high rate of bankruptcy. The offsetting credit is to deferred revenues (realized but not earned. This use is not an expense associated with revenues (matching.640) cash service revenues ($105. which might motivate management to use a cost based measurement. Since the checks were received before the end of the accounting period. given the low level of receivables. Some of the parkers may not belong to the “permanent” local population and might “skip town” without paying. the family use is an income item for tax purposes. The family use of the Waltham Center should generate considerable discussion.300) and credit service sales ($730.) 4-28 . 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. the $400 prepaid August parking checks are part of the end of period cash balance.

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