Case 4 - 1: PC Depot

Note: This case is unchanged from the Twelfth Edition.

Approach

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

Comments on Questions

Question 1

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

Question 2

(These accounts are shown under question 3.)

Question 3

General Journal (cont’d)(9) Cash.........................................................................................................................................................................................................38,000

Sales....................................................................................................................................................................................................38,000(10) Accounts Receivable...............................................................................................................................................................................14,850

Sales....................................................................................................................................................................................................14,850(11) Cash.........................................................................................................................................................................................................3,614

Accounts Receivable...........................................................................................................................................................................3,614(12) Accounts Payable....................................................................................................................................................................................96,195

Cash....................................................................................................................................................................................................96,195(13) Merchandise Inventory............................................................................................................................................................................49,940

Accounts Payable................................................................................................................................................................................49,940(14) Cost of Sales............................................................................................................................................................................................38,140

Merchandise Inventory.......................................................................................................................................................................38,140(15) Wages Expense........................................................................................................................................................................................688

Cash....................................................................................................................................................................................................688(16) Wages Expense........................................................................................................................................................................................440

Accrued Wages...................................................................................................................................................................................440(17) Prepaid Rent............................................................................................................................................................................................1,485

Cash....................................................................................................................................................................................................1,485(18) Prepaid Insurance....................................................................................................................................................................................2,310

Cash....................................................................................................................................................................................................2,310(19) Utilities Expense......................................................................................................................................................................................226

Accounts Payable................................................................................................................................................................................226(20) Furniture and Fixtures.............................................................................................................................................................................1,760

Cash....................................................................................................................................................................................................660Accounts Payable................................................................................................................................................................................1,100

4-1

PC DEPOTBalance Sheet as of September 30

AssetsCash.........................................................................................................................................................................................................$84,661Accounts receivable................................................................................................................................................................................11,236Merchandise inventory............................................................................................................................................................................149,300Prepaid insurance....................................................................................................................................................................................2,117Prepaid rent..............................................................................................................................................................................................1,485Furniture and fixtures..............................................................................................................................................................................$17,260

Accumulated depreciation..................................................................................................................................................................( 144) 17,116Total Assets........................................................................................................................................................................................$265,915

Liabilities ant Owners’ EquityAccounts payable....................................................................................................................................................................................$92,571Accrued wages........................................................................................................................................................................................440Bank loan payable...................................................................................................................................................................................100,000Interest payable........................................................................................................................................................................................1,250Proprietor’s capital..................................................................................................................................................................................65,000Retained earnings.................................................................................................................................................................................... 6,654

Total Liabilities and Owners’ Equity.................................................................................................................................................$265,915

PC DEPOTIncome Statement for September

Sales.........................................................................................................................................................................................................$52,850Cost of sales............................................................................................................................................................................................. 38,140

Gross margin......................................................................................................................................................................................14,710Expenses:

Wages............................................................................................................................................................................................$2,063Advertising....................................................................................................................................................................................1,320Office supplies...............................................................................................................................................................................1,100Utilities..........................................................................................................................................................................................501Rent................................................................................................................................................................................................1,485Insurance........................................................................................................................................................................................193Interest...........................................................................................................................................................................................1,250Depreciation.................................................................................................................................................................................. 144 8,056

Net income..............................................................................................................................................................................................$ 6,654

4-2

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) 440Prepaid Insurance

(18) 2,310 (23) 193 Bank Loan Payable(1) 100,000

Furniture and Fixtures(4) 15,500 Proprietor’s Capital(20) 1,760 (1) 65,000

Accounts Receivable(10) 14,850 (11) 3,614 Prepaid Rent

(17) 1,485Rent Expenses

(2) 1,485 Sales(24) 52,850 (9) 38,000

Advertising Expense (10) 14,850(5) 1,320

Cost of SalesWages Expense (14) 38,140

(6) 935(15) 688 Depreciation Expense(16) 440 (21) 144

Office Supplies Expense Accumulated Depreciation(7) 1,100 (21) 144

Utilities Expense Interest Payable(8) 275 (22) 1,250(19) 226

4-3

Insurance ExpenseInterest Expense (23) 193

(22) 1,250Retained Earnings

Income Summary (25) 6,654(25) 6,654 (24) 52,850

(other closing entries not shown here)

Question 4

Other adjusting entries:

(21) Depreciation Expense [($15,500 + $1,760) / 10] / 12.............................................................................................................................144Accumulated Depreciation.................................................................................................................................................................144

(22) Interest Expense ($100,000 x 15%) / 12)................................................................................................................................................1,250Interest Payable...................................................................................................................................................................................1,250

(23) Insurance Expense ($ 2,310 / 12)............................................................................................................................................................193Prepaid Insurance................................................................................................................................................................................193

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

Question 5

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

(24) Sales.........................................................................................................................................................................................................52,850Income Summary................................................................................................................................................................................52,850

(25) Income Summary....................................................................................................................................................................................6,654Retained Earnings...............................................................................................................................................................................6,654

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

Question 6

The statements appear above.

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