Finance Case

CHAPTER 4
ACCOUNTING RECORDS AND SYSTEMS

Changes from Tenth 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.
Octane Service Station involves a complete cycle of transactions. It involves several judgmental
matters. Some instructors regard it as being too difficult for use here and defer it until a later chapter.
Note: Octane Service Station is quite difficult. Although given in Chapter 4, it can be used as
well in any of the following chapters, or even as a review after Chapter 14.
45
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 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.
46
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
47
11) Dr. Depreciation Expense..........................................................................................................................................

$300
Cr. Accumulated Depreciation......................................................................................................................
$300
b.
(1)
Accounts Payable
$1,720
$3,070
1,300 (1)
Accounts Receivable
$2,160
1,510 (6)
(4)
1,810
Accumulated Depreciation
$2,800
300 (11)
(2)
(5)
(10)
(11)
(3)
(1)
(8)
(9)
Cash
$1,440
$ 730 (2)
1,940
900 (5)
1,510
1,720 (7)
650
200
(1)
Inventories
$1,730
$1,280 (10)
1,300
Allowance for Doubtful Accounts

$70
Fixed Assets (cost)
$6,200
Notes Payable
$600
200 (9)
Owners Equity
Wages
$
$4,990
730
Overhead
900
1,940 Sales (3)
COGS
1,280
1,810 Sales (4)
Depreciation
300
Deferred Revenue
$650 (8)
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
48
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
$119,115
$119,115
Accounts Receivable
$162.500
$162,500
Store Equipment
$215,000
$215,000
Merchandise Inventory
$700,680
$302,990
$397,69
Supplies Inventory
$15,475
$10,265 (3)
$5,210
Prepaid Insurance
$38,250
$4,660 (4)
$33,590
Selling Expense
$24,900
24,900 (a)
(6)
(1)
(3)
Cost of Goods Sold

$302,990
$302,990 (h)
Sales Salaries
$105,750
3,575
109,325 (b)
Depreciation Expense
(2)
$12,750
$12,750 (i)
Supplies Expense
$10,265
$10,265 (j)
(4)
Accrued Interest
$3,730 (5)
$3,730
(7)
(1)
Insurance Expense
$4,660
$4,660 (k)
Accrued Sales Salaries
$3,575 (6)
$3,575
Interest Receivable
390
390
(l)
49
Interest Income
390
390 (7)
General Expenses
$31,000
31,000 (c)
(5)
(d)
Interest Expense
$9,300
3,730
$13,030 (e)
Social Security Taxes

$9, 600
$9,600 (f)
$37,300
12,750 (2)
$50,050
Accounts Payable
$118,180
$118,180
Notes Payable
$143,000
$143,000
Common Stock
$300,000
$300,000
Retained Earnings
$122,375
192,585 (m)
$314,960
(a)
(b)
(c)
(d)
(e)
(f)
(h)
(i)
(j)
(k)
(m)
Sales Discounts
6,220
$6,220
(g)
Sales
$716,935
$716,935
Profit and Loss

24,900
716, 935 (g)
109,325
390 (l)
31,000
6,220
13,030
9,600
302,990
12,750
10,265
4,660
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
50
(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 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
51
(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 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 Tenth 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.
52
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
226
(20) Furniture and Fixtures..............................................................................................................................................
1,760
Cash.....................................................................................................................................................................
660
1,100
53
PC DEPOT
Balance Sheet as of September 30
Assets
Cash.........................................................................................................................................................................................
$84,661
11,236
149,300
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........................................................................................................................................................................
833
Proprietors capital...................................................................................................................................................................
65,000
Retained earnings.....................................................................................................................................................................
7,071
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............................................................................................................................................................................
833
Depreciation...................................................................................................................................................................
144
7,639
Net income...............................................................................................................................................................................
$ 7,071
54
LEDGER
(1)
(9)
(11)
Cash
165,000 (2)
38,000 (4)
3,614 (5)
(6)
(7)
(8)
(12)
(15)
(17)
(18)
(20)
(18)
Prepaid Insurance
2,310 (23)
(4)
(20)
Furniture and Fixtures

15,500
1,760
(10)
Accounts Receivable
14,850 (11)
1,485
15,500
1,320
935
1,100
275
96,195
688
1,485
2,310
660
(3)
(13)
(12)
193
3,614
Rent Expenses
1,485
(24)
(5)
Accounts Payable
96,195 (3)
(13)
(19)
(20)
Accrued Wages
(16)
(17)
(2)
Merchandise Inventory
137,500 (14)
49,940
Advertising Expense
1,320
38,140
137,500
49,940
226
1,100
440
Bank Loan Payable

(1)
100,000
Proprietors Capital
(1)
65,000
Prepaid Rent
1,485
Sales
52,850 (9)
(10)
(14)
Cost of Sales
38,140
(21)
144
38,000
14,850
(6)
(15)
(16)
Wages Expense
935
688
440
(7)
Office Supplies Expense

1,100
(21)
144
(8)
(19)
Utilities Expense
275
226
Interest Payable
(22)
833
55
Interest Expense
833
(22)
(23)
Retained Earnings
(25)
Income Summary
7,071 (24)
52,850
(other closing entries
not shown here)
(25)
Insurance Expense
193
7,071
Question 4
Other adjusting entries:
(21)
(22)
(23)
Depreciation Expense [($15,500 + $1,760) / 10] / 12.......................................................................................

144
Accumulated Depreciation...........................................................................................................................
144
Interest Expense ($100,000 x 10%) / 12)..........................................................................................................
833
Interest Payable............................................................................................................................................
833
Insurance Expense ($ 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)-(21), 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.............................................................................................................................................
7,071
Retained Earnings........................................................................................................................................
7,071
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 Tenth 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.
56
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 on
page 4-6.
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 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
57
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
Sues 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
127,430
127,430
903,130
(1)
604,783
298,347
Store equipment.......................................................................................................................................................................
70,970
70,970
Supplies inventory....................................................................................................................................................................
17,480
(3)
13,603
3,877
12,430
(4)
7,125
5,305
Accumulated
11,420
(2)
10,139
21,559
depreciation..............................................................................................................................................................................
Accounts payable
88,970
88,970
Notes payable...........................................................................................................................................................................
88,500
(6)
2,340
90,840
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
58
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 Tenth 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.
(1)
(2)
(3)
(4)
(5)
(6)
(7)
(8)
(9)
(10)
Journal Entries
Cash..............................................................................................................................................................................
176,450
Sales..........................................................................................................................................................................
176,450
Accounts Receivable.....................................................................................................................................................
64,750
Sales..........................................................................................................................................................................
64,750
Cash..............................................................................................................................................................................
64,750
Accounts Receivable.................................................................................................................................................
64,750
Wages and Salaries (expense).......................................................................................................................................
85,750
Cash..........................................................................................................................................................................
85,750
Heat, Light, and Power (expense).................................................................................................................................
15,000
Cash..........................................................................................................................................................................
15,000
Supplies Inventory .......................................................................................................................................................
52,600
Cash..........................................................................................................................................................................
52,600
Selling and Administration (expense)...........................................................................................................................
28,375
Cash..........................................................................................................................................................................
28,375
Interest Expense............................................................................................................................................................
2,880
Cash..........................................................................................................................................................................
2,880
Bank Loan.....................................................................................................................................................................
12,000
Cash..........................................................................................................................................................................
12,000
Accounts Payable..........................................................................................................................................................
10,400
Cash..........................................................................................................................................................................
10,400
Supplies Inventory........................................................................................................................................................
9,875
Accounts Payable......................................................................................................................................................
9,875
59
(11)
(12)
(13)
(14)
(15)
Depreciation Expense...................................................................................................................................................
15,000
Accumulated Depreciation........................................................................................................................................
15,000
Accounts Receivable.....................................................................................................................................................
11,000
Sales..........................................................................................................................................................................
11,000
Cost of Supplies Used...................................................................................................................................................
60,250
Supplies Inventory....................................................................................................................................................
60,250
Tax Expense..................................................................................................................................................................
11,593
Taxes Payable...........................................................................................................................................................
11,593
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, 2002
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...............................................................................................................................................................................
204,275
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, 2002
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
60
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: Octane Service Station
Note: This case has been used frequently as a quiz on basic accounting concepts and procedures. This
case is unchanged from the Tenth Edition.
Approach
The case enables students to draw transaction data from a commentary which is both more interesting and
more challenging than utilizing a list of transactions, since the student must apply basic concepts in
inferring the transactions.
Following is a list of these transactions in journal entry form, the numbers of which correspond to entries
in the T-accounts below.
Transactions prior to May 1:
(1)
Cash......................................................................................................................................................................
20,000
Owners Equity (or Julio Trevino, Capital)
20,000
This transaction reflects the beginning entity. Some students will
combine this with (2) below, but many find separating the two
conceptually clearer.
(2)
Deposit..................................................................................................................................................................
20,000
Cash................................................................................................................................................................
20,000
This reflects that Trevino used his initial capital to make the
required deposit.
(3)
Equipment.............................................................................................................................................................
12,875
Note Payable...................................................................................................................................................
12,875
This transaction can be combined with (4) below. However, more
students seem to arrive at the correct equipment asset valuation
when this transaction is isolated.
61
(4)
Inventories............................................................................................................................................................
13,250
Prepaid Expenses..................................................................................................................................................
1,420
Notes Payable.......................................................................................................................................................
2,575
Deposit............................................................................................................................................................
17,245
This reflects the assets acquired with all but $2,755 of the initial
deposit.
(5)
Cash......................................................................................................................................................................
2,755
Deposit............................................................................................................................................................
2,755
The excess deposit was returned to Trevino on April 30.
(6)
Cash......................................................................................................................................................................
7,000
Owners Equity...............................................................................................................................................
7,000
Trevino contributed another $7,000 in capital after selling some
more of his personal bonds.
(7)
Equipment.............................................................................................................................................................
1,650
Cash................................................................................................................................................................
1,650
Trevino acquired office furniture. Some students will set up a
separate account, since the furniture has a 10-year life and the
other equipment is expected to last only 5 years.
(8)
Prepaid Expenses..................................................................................................................................................
900
Cash................................................................................................................................................................
900
At this point, these transactions can be posted to enable preparation of a May 1 balance sheet. Cash
transactions between May 1 and June 30:
(9)
Cash......................................................................................................................................................................
69,510
Sales................................................................................................................................................................
69,510
(10)
Cash......................................................................................................................................................................
500
Other Revenue................................................................................................................................................
375
Deferred Revenue...........................................................................................................................................
125
Two comments apply here. First, Trevino should segregate this
item from his service station if he regards these rentals as a
parking lot business separate from his automotive work. This will
facilitate industry comparisons of tile sort seen in the Pinetree
Motel case. Second, the $500 was for two months parking one
fourth of which is skill to come Duly 1-15). Hence, only 3/4 or
$375 is recognized in this accounting period.
(11)
Inventories............................................................................................................................................................
44,694
Cash................................................................................................................................................................
44,694
The debit should be to Inventories, not to Cost of Sales, which is a
figure to be deduced later.
62
(12)
Rent expense.........................................................................................................................................................
2,018
Cash................................................................................................................................................................
2,018
The remainder of the rent expense will come from an adjusting
entry below.
(13)
Labor Expense......................................................................................................................................................
9,450
Cash................................................................................................................................................................
9,450
It might be pointed out to students that this is a period expense
because Trevino is a retailer. In a manufacturing firm, certain
labor costs flow through inventory, as explained in detail in a later
chapter.
(14)
Utilities Expense...................................................................................................................................................
445
Advertising............................................................................................................................................................
690
Miscellaneous Expense.........................................................................................................................................
355
Cash................................................................................................................................................................
1,490
This can, of course, be shown as three separate transactions. It might
be pointed out that treating advertising as an expense illustrates the
conservatism principle winning out over the matching concept. A
more important example of this is the FASB Statement on R&D costs.
(15)
Owners Equity (drawings)...................................................................................................................................

6,750
Cash................................................................................................................................................................
6,750
This is similar to a dividend in an incorporated firm. However, in
this proprietorship, it reflects a mixture of payments to Trevino as
an employee and as an investor (owner). At his former salary of
$865/week, two months salary would be $7,496.
Entries reflecting the accrual concept:

(16)
Accounts Receivable.............................................................................................................................................
199
Sales................................................................................................................................................................
199
This reflects both the widows receivable ($143) and the
completed wax job ($45). Some students will also make a $4 entry
for bad debts. My feeling is that in this instance no allowance need
be made, since the receivables are owed by people apparently
personally known by Trevino. (Also, he has the car as collateral
on the wax job receivable.) Bad debt allowances make sense when
there is a large number of credit transactions, and the bad debts
can be statistically predicted from past experience. But the
evidence is that credit sales will be the exception rather than the
rule for Trevinos station. The point is, the student should think
this through and not create the allowance solely because someone
in a different type of business told Trevino it was a good idea.
63
(17)
Owners Equity (drawings)...................................................................................................................................

79
Inventories......................................................................................................................................................
79
This reflects the fact that drawings can be made in the form of
merchandise rather than cash. Some students will treat this as an
$101 sale (the debit is still to drawings), arguing that Trevino had
to buy gas and oil someplace, and that it was only a coincidence
that Trevino the customer is also Trevino the owner. This
argument has merit and reflects the fact that accounting is not
always so clear-cut as the student may have thought. (This latter
treatment will increase sales, cost of sales, and net income, but the
final balance in owners equity will be the same under either
treatment.)
(18)
Inventories............................................................................................................................................................
1,804
Accounts Payable............................................................................................................................................
1,804
(19)
Rent Expense........................................................................................................................................................
75
75
(20)
Utilities Expense...................................................................................................................................................
425
425
Some students will combine (18)-(20) into one transaction.
(21)
Labor Expense......................................................................................................................................................
232
Accrued Wages...............................................................................................................................................
232
(22)
Inventory Shrinkage..............................................................................................................................................
360
Inventories......................................................................................................................................................
360
The debit can also be made to Cost of Sales.
(23)
Rent Expense........................................................................................................................................................
1,420
Prepaid Expenses............................................................................................................................................
1,420
As with any adjusting entry, a few students will forget this.
(24)
Miscellaneous Expense (or Insurance)..................................................................................................................

150
Prepaid Expense..............................................................................................................................................
150
The policy was for one year, two months of which have elapsed:
1/6 * $900 = $150
(25)
Costs of Sales........................................................................................................................................................
49,291
Inventory.........................................................................................................................................................
49,291
This entry is deduced, based on the physical inventorys showing a
balance of $10,018.
(26)
Depreciation Expense...........................................................................................................................................
457
Accumulated Depreciation..............................................................................................................................
457
This can also be shown as two entries:
Equipment: l/6 * 1/5 * $12,875 = $429
Furniture: 1/6 * 1/10 * $1,650 = $28
64
The posting of these transactions to T-accounts and the closing entries are shown be low. Balances are
drawn as of May 1 (after transactions 1-8) and June 30 (after transactions 9-26).
Question 2
The May-June net income of $3,774 represented an annualized return on Trevinos $20,000 equity
investment of 113 percent! However, this is overstated because it makes no provision for Trevinos
compensation as manager. His drawings (item 15) were less than his former salary. Thus the stations
true profit for these two months is actually a loss of about $1800 or $1900. Since new businesses often
experience losses in their first few months, it is really too soon to judge how good an investment the
station will be for Mr. Trevino.
Assets
(1)
(5)
(6)
(9)
(1)
(2)
(1)
Cash
20,000 (2)
2,755 (7)
7,000 (8)
7,205 (1)
(1)
69,510 (13)
500 (1)
(1)
Deposit
20,000 (4)
(5)
Liabilities
20,000
1,650
900
44,694
2,018
9,450
1,490
6,750
Temporary Accounts
(cont.)
Accounts Payable
(1)
1,804
(1)
75
(2)
425
(4)
Notes Payable
2,575 (3)
12,875
Deferred Revenue
(10)
125
125
17,245
2,755
Accrued Wages
(2)
Accounts Receivable
199
199
232
232
(2)
(1)
(1)
(2)
Rent Expense
2,018 (d)
75
1,420
(1)
(2)
Labor Expense
9,450 (e)
9,682
232
(1)
(2)
(2)
(4)
(1)
(1)
(4)
(8)
Inventories
13,250
(1)
44,694 (2)
1,804 (2)
79
360
49,291
Prepaid Expenses
1,420
900
(2)
1,420
(2)
150
Cost of Sales
49,291 (c)
49,291
(1)
Utilities Expense
445 (f)
425
3,513
870
Inventory Shrinkage
360 (i)
360
Advertising
690 (g)
690
Owners Equity
(1)
(1)
Owners Equity
(1)
20,000
(6)
7,000
6,750
27,000
79
4,716
24, 887
65
(2)
457 (j)
457
(1)
(2)
Miscellaneous Expense
355 (h)
505
150
(3)
(7)
Equipment
12,875
1,650
(2)
457
Temporary Accounts
(a)
(b)
Sales
69,709 (9)
(1)
199
199
Other Revenue
375 (1)
375
(c)
(d)
(e)
(f)
(g)
(h)
(i)
(j)
(k)
Expense & Revenue

Summary
49,291 (a)
69,709
3,513 (b)
375
9,682
870
690
505
360
457
65,368
70,084
4,716
Preparation of the May 1 and June 30 balance sheets and May-June income statement from these Taccounts is straightforward and will not be shown here. Total assets as of May 1 were $37,300 and as of
June 30, $37,848.
66

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CHAPTER 4

ACCOUNTING RECORDS AND SYSTEMS

1) Dr. Prepaid Rent...............................................................................................................................................................

Dr. Sales Discounts and Allowances................................................................................................................................

3) Dr. Interest Receivable.....................................................................................................................................................

4) Dr. Depreciation Expense.................................................................................................................................................

6) Dr. Stamp Expense...........................................................................................................................................................

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

2) Dr. Wages Expense....................................................................................................................................................

4) Dr. Accounts Receivable...........................................................................................................................................

5) Dr. Overhead and Other Expenses.............................................................................................................................

7) Dr. Accounts Payable................................................................................................................................................

10) Dr. Cost of Goods Sold..............................................................................................................................................

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

Allowance for Doubtful Accounts

Cost of Goods Sold

Social Security Taxes

Profit and Loss

Adjusting entries are:

(1) Dr. Cost Of Goods Sold...........................................................................................................................................

(2) Dr. Depreciation Expense.........................................................................................................................................

(3) Dr. Supplies Expense...............................................................................................................................................

(4) Dr. Insurance Expense..............................................................................................................................................

(5) Dr. Interest Expense.................................................................................................................................................

(6) Dr. Sales Salaries.....................................................................................................................................................

(7) Dr. Interest Receivable.............................................................................................................................................

(a) Dr. Profit and Loss...................................................................................................................................................

(b) Dr. Profit and Loss...................................................................................................................................................

(c) Dr. Profit and Loss...................................................................................................................................................

(d) Dr. Profit and Loss...................................................................................................................................................

(e) Dr. Profit and Loss...................................................................................................................................................

(f) Dr. Profit and Loss...................................................................................................................................................

(g) Dr. Sales...................................................................................................................................................................

(h) Dr. Profit and Loss...................................................................................................................................................

(i) Dr. Profit and Loss...................................................................................................................................................

(j) Dr. Profit and Loss...................................................................................................................................................

(k) Dr. Profit and Loss...................................................................................................................................................

(l) Dr. Interest Income...................................................................................................................................................

(m) Dr. Profit and Loss...................................................................................................................................................

General Journal (contd)

Furniture and Fixtures

Bank Loan Payable

Office Supplies Expense

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

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

Liabilities and Owners Equity

Owners Equity (drawings)...................................................................................................................................

Entries reflecting the accrual concept:

Owners Equity (drawings)...................................................................................................................................

Miscellaneous Expense (or Insurance)..................................................................................................................

Expense & Revenue

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