Chapter 03 – Operating Decisions and the Accounting System
3-15
HANDOUT 3 – 1, continued
(g) Paid $3,000 insurance for next year in advance.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
(h) Paid $9,000 rent for next six months in advance.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
(i) Received $250 telephone bill for previous month, to be paid next month.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Chapter 03 – Operating Decisions and the Accounting System
3-16
HANDOUT 3 – 1, continued
(j) Received $500 utility bill for this month, to be paid immediately.
Debit and credit the accounts affected
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Chapter 03 – Operating Decisions and the Accounting System
3-17
HANDOUT 3 – 1 SOLUTION
TRANSACTION ANALYSIS
Tabor Hill Designers entered into the following transactions during February 2014. Analyze each of the
following transactions and prepare the journal entry required to record the related transaction.
(a) Provide website design services for $40,000.
Debit and credit the accounts affected
Cash (+A)
40,000
Design Revenue (+R, +SE)
40,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Cash
+40,000
Revenue
+40,000
(b) Provide website design services to Acme Company, for $20,000 on account. We expect Acme to pay
in the future.
Debit and credit the accounts affected
Accounts Receivable (+A)
20,000
Design Revenue (+R, +SE)
20,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Acct. Rec.
+20,000
Revenue
+20,000
(c) Collect $18,000 from Acme Company on account.
Debit and credit the accounts affected
Cash (+A)
18,000
Accounts Receivable (–A)
18,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+18,000
Acct. Rec.
–18,000
Chapter 03 – Operating Decisions and the Accounting System
3-18
HANDOUT 3 – 1 SOLUTION, continued
(d) Sell a $1,000 gift certificate.
Debit and credit the accounts affected
Cash (+A)
1,000
Unearned Revenue (+L)
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
+1,000
Unearned
Rev.
+1,000
(e) Customer redeems $1,000 gift certificate for website design services.
Debit and credit the accounts affected
Unearned Revenue (-L)
1,000
Design Revenue (+R, +SE)
1,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Unearned
Revenue
-1,000
Revenue
+1,000
(f) Paid employees $16,000 earned.
Debit and credit the accounts affected
Wage Expense (+E, –SE)
16,000
Cash (–A)
16,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Cash
–16,000
Wage Exp.
–16,000
Chapter 03 – Operating Decisions and the Accounting System
3-19
HANDOUT 3 – 1 SOLUTION, continued
(g) Paid $3,000 insurance for next year in advance.
Debit and credit the accounts affected
Prepaid Expenses (+A)
3,000
Cash (–A)
3,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Ppd. Exp.
+3,000
Cash
–3,000
(h) Paid $9,000 rent for next six months in advance.
Debit and credit the accounts affected
Prepaid Expenses (+A)
9,000
Cash (–A)
9,000
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Ppd. Exp.
+9,000
Cash
–9,000
(i) Received $250 telephone bill for previous month, to be paid next month.
Debit and credit the accounts affected
Telephone Expense (+E, –SE)
250
Accounts payable (+L)
250
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Accts. Pay.
+250
Tel. Exp
–250
(j) Received $500 utility bill for this month, to be paid immediately.
Debit and credit the accounts affected
Utilities Expense (+E, –SE)
500
Cash (–A)
500
Ensure the equation still balances and debits = credits
Assets
=
Liabilities
+
Stockholders’ Equity
Cash
–500
Utilities Exp.
–500
Chapter 03 – Operating Decisions and the Accounting System
3-20
HANDOUT 3 – 2
POSTING TO T-ACCOUNTS
The following T-accounts set forth the ending balances of the accounts of Tabor Hill Designers as of
January 31, 2014. Refer to Handout 3-1. Post each of the February 2014 journal entries to the T-accounts.
Assets
Liabilities
Stockholders’ Equity
+ Cash –
BegBal
3,100
+ Accounts Receivable –
BegBal
0
+ Supplies –
BegBal
900
+ Prepaid Expenses –
BegBal
0
+ Property, Plant & Equipment –
BegBal
21,000
– Accounts Payable +
0
BegBal
– Notes Payable +
15,000
BegBal
– Unearned Revenue +
0
BegBal
– Common Stock +
10,000
BegBal
– Retained Earnings +
0
BegBal
– Design Revenue +
0
BegBal
+ Wage Expense –
BegBal
0
+ Utilities Expense –
BegBal
0
+ Telephone Expense –
BegBal
0
Chapter 03 – Operating Decisions and the Accounting System
3-21
HANDOUT 3 – 2 SOLUTION
POSTING TO T-ACCOUNTS
The following T-accounts set forth the ending balances of the accounts of Tabor Hill Designers as of
January 31, 2014. Refer to Handout 3-1. Post each of the February 2014 journal entries to the T-accounts.
Assets
Liabilities
Stockholders’ Equity
+ Cash –
BegBal
3,100
(a)
40,000
16,000
(f)
(c)
18,000
3,000
(g)
(d)
1,000
9,000
(h)
500
(j)
EndBal
33,600
+ Accounts Receivable –
BegBal
0
(b)
20,000
18,000
(c)
EndBal
2,000
+ Supplies –
BegBal
900
EndBal
900
+ Prepaid Expenses –
BegBal
0
(g)
3,000
(h)
9,000
EndBal
12,000
+ Property, Plant & Equipment –
BegBal
21,000
EndBal
21,000
– Accounts Payable +
0
BegBal
250
(i)
250
EndBal
– Notes Payable +
15,000
BegBal
15,000
EndBal
– Unearned Revenue +
0
BegBal
(e)
1,000
1,000
(d)
0
EndBal
– Common Stock +
10,000
BegBal
10,000
EndBal
– Retained Earnings +
0
BegBal
0
EndBal
– Design Revenue +
0
BegBal
40,000
(a)
20,000
(b)
1,000
(e)
61,000
EndBal
+ Wage Expense –
BegBal
0
(f)
16,000
EndBal
16,000
+ Utilities Expense –
BegBal
0
(j)
500
EndBal
500
+ Telephone Expense –
BegBal
0
(i)
250
EndBal
250
Chapter 03 – Operating Decisions and the Accounting System
3-22
HANDOUT 3 – 3
PREPARING A TRIAL BALANCE
Use the ending balances from the T-accounts on Handout 3-2 to prepare a trial balance for World Wide
Webster as of December 31, 2014.
World Wide Webster
Trial Balance
At February 28, 2014
Debit
Credit
Chapter 03 – Operating Decisions and the Accounting System
3-23
HANDOUT 3 – 3
PREPARING A TRIAL BALANCE
Use the ending balances from the T-accounts on Handout 2-5 to prepare a trial balance for World Wide
Webster as of December 31, 2014.
World Wide Webster
Trial Balance
At February 28, 2014
Debit
Credit
Cash
33,600
Accounts receivable
2,000
Supplies
900
Prepaid expenses
12,000
Property, plant, and equipment
21,000
Accounts Payable
250
Notes Payable
15,000
Common Stock
10,000
Retained Earnings
0
Design revenue
61,000
Wage expense
16,000
Utilities expense
500
Telephone expense
250
Totals
86,250
86,250
Chapter 03 – Operating Decisions and the Accounting System
3-24
HANDOUT 3 – 4
PREPARING A CLASSIFIED INCOME STATEMENT
Use the ending balances from the T-accounts on Handout 3-2 to prepare a classified income statement for
Tabor Hill as of and for the month ended February 28, 2014. (Ignore income tax expense.)
Tabor Hill Designers
Income Statement
For the Month ended February 28, 2014
Chapter 03 – Operating Decisions and the Accounting System
3-25
HANDOUT 3 – 4 SOLUTION
PREPARING A CLASSIFIED INCOME STATEMENT
Use the ending balances from the T-accounts on Handout 3-2 to prepare a classified income statement for
Tabor Hill as of and for the month ended February 28, 2014. (Ignore income tax expense.)
Tabor Hill Designers
Income Statement
For the Month Ended February 28, 2014
Design revenue
$61,000
Operating Expenses:
Wage expense
16,000
Utilities expense
500
Telephone expense
250
Total operating expenses
16,750
Income before taxes
44,250
Income tax expense
0
Net income
$44,250
Chapter 03 – Operating Decisions and the Accounting System
3-26
HANDOUT 3 – 5
NET PROFIT MARGIN RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Tabor Hill
Designers for the month ending February 28, 2014. Then, indicate what this ratio measures and how you
would interpret the results.
Calculation:
What it measures and how to interpret:
Chapter 03 – Operating Decisions and the Accounting System
3-27
HANDOUT 3 – 5 SOLUTION
NET PROFIT MARGIN RATIO
Refer to the financial statements from Handout 3-3 and calculate the net profit margin ratio of Tabor Hill
Designers for the month ending February 28, 2014. Then, indicate what this ratio measures and how you
would interpret the results.
Calculation:
Net Profit Margin = Net Income ÷ Net Sales (or Operating Revenues)
Net Profit Margin = $44,250 ÷ $61,000 = 0.725 or 72.5%
What it measures and how to interpret:
The net profit margin ratio measures the profit generated per dollar of sales (operating revenues).
Tabor Hill is generating $0.725 of net income per dollar of operating revenues.
The net profit margin ratio would be interpreted by comparison to that of prior periods and to that of
the company’s competitors.
The higher the ratio, the more effective the company is at generating revenues and/or controlling costs.