Chapter 03 – Operating Decisions and the Accounting System
3-16
HANDOUT 3 – 1, continued
(d) Sell a $1,000 gift certificate.
Debit and credit the accounts affected
(e) Paid $900 principal and $100 interest on the short-term note payable.
Debit and credit the accounts affected
(f) Paid $16,000 wages to employees.
Debit and credit the accounts affected
Chapter 03 – Operating Decisions and the Accounting System
3-17
HANDOUT 3 – 1, continued
(g) Paid $3,000 insurance for next year in advance.
Debit and credit the accounts affected
(h) Paid $9,000 rent for next six months in advance.
Debit and credit the accounts affected
(i) Received $250 telephone bill for previous month, to be paid next month.
Debit and credit the accounts affected
Chapter 03 – Operating Decisions and the Accounting System
3-18
HANDOUT 3 – 1, continued
(j) Paid $500 utility bill for this month.
Debit and credit the accounts affected
Chapter 03 – Operating Decisions and the Accounting System
3-19
HANDOUT 3 – 1 SOLUTION
TRANSACTION ANALYSIS
Tabor Hill Designers entered into the following transactions during February of the current year. 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
=
+
Revenue
(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
(c) Collect $18,000 from Acme Company on account.
Debit and credit the accounts affected
Cash (+A)
18,000
Cash
Chapter 03 – Operating Decisions and the Accounting System
3-20
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)
(e) Paid $900 principal and $100 interest on the short-term note payable.
Debit and credit the accounts affected
Short-Term Note Payable (-L)
900
Interest Expense (+E, –SE)
Cash (-A)
1,000
Ensure the equation still balances and debits = credits
=
+
(f) Paid $16,000 wages to employees.
Debit and credit the accounts affected
Wage Expense (+E, –SE)
16,000
Cash (–A)
=
+
Chapter 03 – Operating Decisions and the Accounting System
3-21
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
=
+
Expenses
Cash
(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
=
+
Cash
(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
=
+
Payable
Expense
(j) Paid $500 utility bill for this month.
Debit and credit the accounts affected
Utilities Expense (+E, –SE)
500
Cash (–A)
500
=
+
Chapter 03 – Operating Decisions and the Accounting System
3-22
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 of the current year. Refer to Handout 3-1. Post each of the February journal entries to the T-
accounts.
Assets
Liabilities
Stockholders’ Equity
+ Cash –
BegBal
4,100
BegBal
0
0
BegBal
15,000
BegBal
BegBal
0
BegBal
+ Supplies –
BegBal
900
+ Prepaid Expenses –
BegBal
0
BegBal
21,000
BegBal
0
BegBal
0
– Accounts Payable +
0
BegBal
– Common Stock +
10,000
BegBal
+ Wage Expense –
BegBal
0
+ Utilities Expense –
BegBal
0
Chapter 03 – Operating Decisions and the Accounting System
3-23
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 31of the current year. Refer to Handout 3-1. Post each of the February journal entries to the T-
accounts.
Assets
Liabilities
Stockholders’ Equity
+ Cash –
BegBal
4,100
(a)
40,000
1,000
(e)
(c)
18,000
16,000
(d)
1,000
3,000
(g)
9,000
(h)
500
EndBal
33,600
250
0
BegBal
1,000
10,000
1,000
BegBal
1,000
EndBal
+ Accounts Receivable –
BegBal
0
(b)
20,000
18,000
(c)
EndBal
2,000
EndBal
900
BegBal
0
(g)
3,000
(h)
9,000
EndBal
12,000
BegBal
21,000
EndBal
21,000
BegBal
0
16,000
EndBal
16,000
BegBal
0
500
EndBal
500
BegBal
0
250
EndBal
250
– Accounts Payable +
0
BegBal
250
(i)
1,000
EndBal
– Short-Term Notes Payable +
15,000
BegBal
(e)
900
14,100
EndBal
– Common Stock +
10,000
BegBal
– Design Revenue +
0
BegBal
40,000
(a)
20,000
(b)
60,000
EndBal
+ Interest Expense –
BegBal
0
(e)
100
EndBal
100
Chapter 03 – Operating Decisions and the Accounting System
3-24
HANDOUT 3 – 3
PREPARING A TRIAL BALANCE
World Wide Webster
Trial Balance
At February 28, Current Year
Debit
Credit
Chapter 03 – Operating Decisions and the Accounting System
3-25
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 February 28 of the current year.
World Wide Webster
Trial Balance
At February 28, Current Year
Debit
Credit
Cash
33,600
Accounts receivable
2,000
Supplies
900
Prepaid expenses
Property, plant, and equipment
Accounts Payable
Unearned Revenue
Short-Term Notes Payable
14,100
Common Stock
Retained Earnings
Design revenue
Wage expense
16,000
Telephone expense
Interest expense
100
Totals
Chapter 03 – Operating Decisions and the Accounting System
3-26
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
Chapter 03 – Operating Decisions and the Accounting System
3-27
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 of the current year. (Ignore income tax expense.)
Tabor Hill Designers
Income Statement
For the Month Ended February 28, Current Year
Design revenue
$60,000
Wage expense
Utilities expense
Total operating expenses
16,750
Other items:
Income before income taxes
Income tax expense
Chapter 03 – Operating Decisions and the Accounting System
3-28
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
Calculation:
What it measures and how to interpret:
Chapter 03 – Operating Decisions and the Accounting System
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 of the current year. Then, indicate what this ratio measures
and how you would interpret the results.
Calculation:
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 just under $0.72 of net income per dollar of operating revenues.