CHAPTER 4

ACCOUNTING RECORDS AND SYSTEMS

Changes from Eleventh Edition

The chapter has been updated.

Approach
Instructors will differ in the coverage that they give to this chapter, depending on their personal
preference and on the background of their students. For executive groups, the material may either be
omitted altogether or suggested as optional reading. For students who have previously had a course in
accounting, a review of this chapter is probably desirable, even though there should be nothing new in it
for them. For beginning students, we find it highly desirable to give much practice in the mechanics of
accounting. As pointed out in the text, this practice is intended to provide facility in a tool that will prove
useful in later work in analyzing problems, rather than to make the students into expert bookkeepers.

Instructors have taught a whole first course in accounting without once mentioning debit and credit. We
believe that their principal motive for doing this is to prove to their colleagues that it can be done.
Actually, the debit and credit mechanism is a device that permits the students to record the results of their
analysis of transactions unambiguously. It also facilitates clear communication in the classroom.
Discussion is likely to be cumbersome and subject to much misunderstanding if debits and credits are not
required.

Many of the fine points of bookkeeping are omitted from the text, but our experience has been that
enough information is given so that students understand the idea of debit and credit and can use the
journal, ledger, and other tools in analyzing subsequent cases.

Cases
The first two cases are primarily for practice and drill. It is perhaps not even necessary to discuss both of
them in detail in class although some time should be allowed for students to raise questions. As in other
cases, no standard terminology should be enforced although it may be in order to call attention at this
point to the fact that when the name of an account is given, this precise name should be used in the
journal entries.

One of the cases is an unincorporated business and the other is a corporation, so that the student can
observe that there is a very little difference in the recordkeeping for these two types of businesses. Also,
in one case the accounting period is a year and in the other it is a month, to emphasize the similarity of
accounting for these different time intervals.

Copies Express is a straightforward complete cycle problem.

Waltham Oil and Lube Center involves journal entries and testing of student knowledge of common
accounts.

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

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Accounting: Text and Cases 12e Instructors Manual Anthony/Hawkins/Merchant

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 periods income
statement.

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

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

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

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

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

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

$1,350
Allowance for doubtful accounts..................................................................................................................
$1,350
Bad debt expense account is an expense account. Allowance for doubtful accounts is a contra asset
displayed as a deduction from the asset accounts receivable.
Problem 4-3
a.
1) dr. Inventory........................................................................................................................................................
$1,300
cr. Accounts payable.......................................................................................................................................
$1,300

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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 Owners equity
Accumulated depreciation..........................................................................................................................................................
(3,100) Owners equity.......................................................................................
5,530
Total liabilities
Total assets............................................................................................................................................................................
$9,630 and owners equity.............................................................................
$9,630

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

Problem 4-4
a.
Cash and Equivalents Accounts Receivable
$119,115 $162.500
$119,115 $162,500

Store Equipment Merchandise Inventory

$215,000 $700,680 $302,990 (1)
$215,000 $397,690

Supplies Inventory Prepaid Insurance

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

Selling Expense Sales Salaries

$24,900 24,900 (a) $105,750
(6) 3,575 109,325 (b)

Cost of Goods Sold Depreciation Expense

(1) $302,990 $302,990 (h) (2) $12,750 $12,750 (i)

Supplies Expense Insurance Expense

(3) $10,265 $10,265 (j) (4) $4,660 $4,660 (k)

Accrued Interest Accrued Sales Salaries

$3,730 (5) $3,575 (6)
$3,730 $3,575

Interest Receivable Interest Income

(7) 390 (l) 390 390 (7)
390

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Miscellaneous General Expenses Sales Discounts

$31,000 31,000 (c) (d) 6,220 $6,220

Interest Expense Social Security Taxes

$9,300 $9, 600 $9,600 (f)
(5) 3,730 $13,030 (e)

Accumulated Depreciation Accounts Payable

$37,300 $118,180
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

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

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

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

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

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

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

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

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

Closing entries are:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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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
Proprietors capital..........................................................................................................................................................................
65,000
Retained earnings............................................................................................................................................................................
6,654
Total Liabilities and Owners Equity..........................................................................................................................................
$265,915

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

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LEDGER
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 Proprietors 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

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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
Note that two more T accounts have been created for the closing process.

Question 6
The statements appear above.

Case 4- 2: Save-Mart
Note: This case is unchanged from the Eleventh Edition.

Approach
This is a straightforward problem in making adjusting and closing entries. Students may raise the
possibility of recording social security taxes on accrued sales salaries; this has not been done in the
accompanying solution.

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Questions 1-4

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

SAVE-MART COMPANY
Balance Sheet as of February 28
Assets
Current assets:....................................................................................................................................................................
Cash...............................................................................................................................................................................
$ 88,110
Accounts receivable......................................................................................................................................................
127,430
Merchandise inventory..................................................................................................................................................
298,347
Supplies inventory.........................................................................................................................................................
3,877
Prepaid insurance..........................................................................................................................................................
5,305
Toted current assets..................................................................................................................................................
523,069
Plant and Equipment:.........................................................................................................................................................
Store equipment.............................................................................................................................................................
$ 70,970
Less: Accumulated depreciation....................................................................................................................................
( 21,559) 49,411
Total assets.........................................................................................................................................................................
$572,480
Equities
Liabilities
Accounts payable..........................................................................................................................................................
$ 88,970
Notes and wages payable...............................................................................................................................................
90,840
Interest payable.............................................................................................................................................................
865
Total liabilities..........................................................................................................................................................
180,675
Stockholders equity:..........................................................................................................................................................
Common stock $100,000
Retained earnings 291,805 391,805
Total equities......................................................................................................................................................................
$572,480

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Accounting: Text and Cases 12e Instructors Manual Anthony/Hawkins/Merchant

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

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

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Cost of goods sold..............................................................................................................................................................

(1) 604,783 604,783
Depreciation.......................................................................................................................................................................
(2) 10,139 10,139
Supplies expense................................................................................................................................................................
(3) 13,603 13,603
Insurance expense..............................................................................................................................................................
________ ________ (4) 7,125 _______ 7,125 ________
1,311,090 1,311,090 639,605 639,605 1,324,434 1,324,434

Case 4- 3: Copies Express

Note: This case is updated from the Eleventh Edition.

Approach
This is a straightforward complete cycle accounting problem. The transactions and financial statements
follow.

Some students may develop a cost of sales amount, including wages, supplies, and perhaps some other
items. Actually, the case data are not complete enough to know which of Copies Express expenses are
analogous to cost of goods sold for a manufacturing firm, and which are definitely period expenses (e.g.,
a portion of utilities). These students efforts should not be discouraged at this point, as they are making
good efforts to incorporate important concepts despite the limitations in the data presented. Rather, the
students efforts can be used to raise the question of whether it would be useful for Copies Express to
have a gross margin figure, assuming one could be developed with some elaboration of the chart of
accounts.

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

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Accounting: Text and Cases 12e Instructors Manual Anthony/Hawkins/Merchant

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

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

COPIES EXPRESS
Balance Sheet as of December 31, 2006
Assets
Current assets..................................................................................................................................................................................
Cash (2,000 + 241,200 - 207,005)..............................................................................................................................................
$ 36,195
Accounts receivable...................................................................................................................................................................
11,000
Supplies inventory (24,400 + 52,600 + 9,875 - 60,250)............................................................................................................
26,625
Total......................................................................................................................................................................................
$ 73,820
Property, plant and equipment.........................................................................................................................................................
Building and equipment.............................................................................................................................................................
$300,000
Less: Accumulated depreciation.................................................................................................................................................
15,000 285,000
Land...........................................................................................................................................................................................
12,000
Total Assets...........................................................................................................................................................................
297,000
$370,820

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2007 McGraw-Hill/Irwin Chapter 4

Liabilities and Owners Equity

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

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

Note: A new case for the Twelfth Edition

Approach

The case is designed to give students a bookkeeping experience within a class discussion that is more
interesting that the typical bookkeeping class.

The case asks students to prepare the journal entries for a new business initial three months of operations;
derive directly from the journal entries certain end of the period account balances; and comment on
several accounting policy decisions facing the management.

The journal entry requirement is straightforward, but some students may find it somewhat difficult
because the entries must be prepared using a case format rather than a problem format. The class
discussion of account balances is designed to test the students understanding of account definitions and
the relationship of journal entries to the account balances. Finally, the case includes several additional
actual and potential transactions that will generate class discussion as to the correct way to account for the
transaction. This latter discussion and the account balance discussion can be combined.

Some instructors use the case to discuss the complete accounting cycle. If the case is used for this
purpose, the instructor must assign the questions for this assignment. Since students in the early stages of
the course (up through Chapter 4) may have trouble with this challenging assignment, instructors using
the case for a discussion of the full accounting cycle usually assign the case later in the course (Chapter 5
onwards.)

Question 1

The journal entries are:

1) $40,000 Capital contribution

Cash 40,000
Capital 40,000

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Accounting: Text and Cases 12e Instructors Manual Anthony/Hawkins/Merchant

2) $40,000 Deposit with National

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

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

Prepaid Insurance 1,200

Cash 1,200
6) $35,450 deductions from deposit
Oil and grease inventory 6,320
Operating supplies and uniforms 4,130
Equipment 25,000
Deposit 35,450
7) $1500 Lease payment
Lease expense 1,500
Cash 1,500
8) $49,800 Equipment payable
Equipment 49,800
Equipment payable 49,800
9) $108,600 Bank deposits
Cash 108,600
Parking revenue 3,300
Services revenue 105,300
10) $8,230 Inventory purchases (oil and grease)
Inventory 8,230
Cash 8,230
11) $34,560 Payroll payments
Payroll expense 34,560
Cash 34,560
12) $1700 Utilities payments
Utilities expense 1,700
Cash 1,700
13) $6,600 miscellaneous payments
Miscellaneous expenses 6,600
Cash 6,600
14) $26,400 Lease payments
Lease expense 26,400
Cash 26,400
15) $2,490 Equipment payables payments
Equipment payable 2,490
Cash 2,490
16) $4,500 Withdrawals (Knight)
Withdrawals 4,500
Cash 4,500

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2007 McGraw-Hill/Irwin Chapter 4

17) $340 Receivable parking

Accounts receivable 340
Parking Revenues 340
18) $730 Receivable local merchant
Accounts receivable 730
Service Revenues 730
19) $2100 Unpaid payroll
Payroll expense 2100
Accrued payroll 2100
20) $350 Unpaid utilities
Utilities expense 350
Accrued utilities 350
21) $9,260 Cost of Sales (oil and grease)1
Cost of Sales 9,260
Inventory 9260
22) $150 Furniture depreciation2
Depreciation expense 150
Accumulated depreciation 150
23) $3,750 Equipment depreciation3
Depreciation expense 3,750
Accumulated depreciation 3,750
24) $400 August parking prepayments
Cash 400
Deferred parking revenue 400
25) $300 Insurance expense4
Insurance expense 300
Prepaid Insurance 300

Question 2

A) Capital

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

1
Beginning Inventory $ 6,320
Purchases 8,230
Total Available $14,550
Ending Inventory 5,290
Cost of Sales $9,260
2
($6,000/ 10 years) x .25 = $150
3
($75,000/ 5 years) x .25 = $3,750
4
$1200 x .25 = $300

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Accounting: Text and Cases 12e Instructors Manual Anthony/Hawkins/Merchant

B) Accumulated depreciation

The accumulated depreciation account is the sum of two amounts ($150 and $3,750.) The
balance is $3,900. Students should be encouraged to explain why depreciable assets are reported at cost
with the accumulated depreciation account shown as a contra asset account. Statement users want to
know the cost of the assets being used and the extent to which they have been depreciated. Statement
users can use their data to estimate the average age of a depreciable asset (accumulated depreciation /
annual straight-line depreciation expense.)

C) Prepaid Asset

The only prepaid asset is prepaid insurance. The balance is $900 ($1200 - $300.) One-quarter of
the insurance coverage benefit has expired ($1200 x .25.) Students should be asked why was the
insurance payment was not expensed on May 1. The answer is it met the definition of an asset (future
economic benefits) and its expiration accounting is influenced by the matching concept.

D) Cash balance

The cash T account is (Journal entry indicated)

Cash
1) 40,000 2) 40,000
4) 10,000 3) 6,000
9) 108,600 5) 1,200
24) 400 7) 1,500
10) 8,230
11) 34,560
12) 1,700
13) 6,600
14) 26,400
15) 2,490
16) 4,500
Balance 25,820

The cash balance is $25,820. Some students might argue the $400 prepaid parking checks do not belong
in the July 31 cash balance. In their view the payment was not received until after that date. The case is
deliberately vague on this point. The instructor can use this vagueness to raise the question as to the
significance of cut off dates.

E) Accounts Receivable

Waltham Center is owed $340 by overnight parkers and $730 by local merchants. The accounts
receivable balance is $1070. Here or later in the class, the bad debt issue can be discussed. In either case
the instructor should take advantage of the issue to illustrate how bad debt accounting works and have the
class discuss why accounts receivable are reported net of bad debt allowance (assets should be reported at
their net realized value.)

F) Liabilities

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2007 McGraw-Hill/Irwin Chapter 4

There are three liabilities at the end of the three month operating period. Two are the current
liabilities accrued payroll $2,100 and accrued utilities $350. The third is the longer term obligation for
the equipment ($47,310.) The liability account balance is $49,760. During the liability discussion the
instructor should ask what is the current liability balance? The correct answer is $12,410 ($12,410 =
$2,100 + 350 + 9,960 current maturity of equipment payable [$830 + 12 = $9,960]). The two accrued
liabilities mentioned above plus the current maturity on the long-term obligation. The instructor should
use the discussion to review the distinction between current and non current balance sheet accounts.

Some advanced students may challenge the liability total. They may want to impute an interest
charge on the non interest bearing note. If students do not raise this issue, the instructor is well advised
not to raise it. The class is not ready at this time for a present value-type discussion.

Question 2

a) Withdrawals

The amount of the withdrawals is not the interesting question. The interesting question is how
should Knight view his withdrawals in his assessment of the progress of his business to date. Is the
$4,500 withdrawal a dividend? Wages? If Knight is trying to assess how well his business has done, he
might account for the withdrawals as wages. On the other hand, if he is trying to answer how much he
has earned on his investment, he might regard the withdrawals as dividends. In either case the
instructor might consider including the opportunity cost of wages foregone by not working elsewhere.

b) Cost of Sales

See note to cost of sales journal entry.

c) Parking revenues

The amount is $3,640 ($3,300 cash received plus $340 owed.) Some students may want to
deduct a bad debt provision from gross revenues. Accounting does not work that way. It reports
provisions for bad debts as an expense item. Other students may want to include the $400 prepaid August
parking. This would be an error. The prepayment has not been earned (it has been realized.) It is a
deferred revenue item (a liability.)

d) Lease Expenses

The total amount is $27,900 (May $1500 prepaid flat rental plus $3,000 June July flat rental
paid plus $23,400 per car $10 payments.) Some students will forget the prepaid May rental. This
discussion gives the instructor an opportunity to discuss how a prepaid expense becomes an expense.

e) Total Revenues

Total revenues is the sum of parking revenues ($3,640) cash service revenues ($105,300) and
credit service sales ($730.) The amount is $109,670. Some students may forget the credit service sales.

The service and rental revenues should be reported separately. In this way the profitability of
each activity can be assessed.

Question 4

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Accounting: Text and Cases 12e Instructors Manual Anthony/Hawkins/Merchant

Some instructors use the revenue and bad debts discussion here and above as a lead into or part of
their Chapter 5 assignments.

Since the checks were received before the end of the accounting period, the $400 prepaid August
parking checks are part of the end of period cash balance. The offsetting credit is to deferred revenues
(realized but not earned.) See discussion above.

A provision for bad debt might be considered. Some of the parkers may not belong to the
permanent local population and might skip town without paying. Also, small businesses have a high
rate of bankruptcy. On the other hand, given the low level of receivables, any bad debt allowance might
not be material enough to warrant accounting recognition of a bad debt allowance.

The family use of the Waltham Center should generate considerable discussion. Is the family use
revenue? A cost? A withdrawal? Measured at retail? Measured at cost? Worth worrying about?
Accounting, if the amount is material, treats the family use as a withdrawal measured at cost. This use is
not an expense associated with revenues (matching.) It is not a revenue (not realized.) The amount is not
measured at retail (accounting does not recognize opportunity costs.) Measurement at cost reflects the
replacement cost value of the asset transferred to the owners. In this case the cost is probably worth
worrying about since the family use is a form of leakage that may become more significant and distort
the operating results if not controlled. (Technically, the family use is an income item for tax purposes,
which might motivate management to use a cost based measure ment.)

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