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Case 1-2 tabs begin after the Case 1-1 tabs on the bottom of the exc
1 answers are entered into the tabs so your team can start Case 2-2
is recommended to read through the Case 1-1 tabs to assure your ar
AFTER YOU READ THROUGH THE CASE 1-1 TABS, PLEASE START WIT
FURTHER CASE 1-2 INSTRUCTIONS.
For any questions, please contact Robert Bauters and David Valensi
dvalensi@purdue.edu.
10/14/2013
10/24/2013
Case 1-1: Instructions
1. Assume the role of accountant Justin Phillips and complete the requirements 1 - 9.
You are encouraged to enter in your own formulas where there aren't any formulas
already in place. (e.g. using the Sumation/Addition/Subtraction Formula(s) to
total a T-Account).
4. The TA's leading Case 1-1 will not be answering questions the day before and the
day the case is due.
5. If a member on your team is not participating equally and/or fairly, it is All team
members' responsibility to report this person to the TA's in charge of the case.
Students who do not fully participate in the case will receive a deduction in the team's
final case grade.
The TA's in charge of the case projects are Robert Bauters (rbauters@purdue.edu)
and David Valensi (dvalensi@purdue.com).
6. Submission:
When you finish the case, please save the document with the correct Section and
Group number ("MGMT200_Section1_Group1") and upload it into blackboard.
Only one person per group should upload the case into blackboard.
Please enter the names of everyone on your team below.
Instructions:
Using the account titles provided for you in Exhibit 1.1 and referring back to the Narrative as needed, please prepare
journal entries (using good form) as necessary for the transactions and events described in the accompanying exhibits for
this case. That is, you should prepare only those specific entries required to record the transactions described in these
materials. You are not to consider adjusting entries that would be recorded after the events described in these exhibits.
Some dates will not require an entry and not all entries will use all of the lines available. For dates that do not require
any entries, enter "No Entry Required". PLEASE USE EXHIBIT 1.1 FOR NAMES OF THE ACCOUNTS.
$ 15,595 $ 10,925
Other Receivable Supplies
11/30 $ - 11/30 $ -
Dec 10 (ii) $ 750 Dec 16 $ 800
$ 750 $ 800
$ 30,000
$ 300
$ 47,500
STOCK
$ 25,300
$ 300
$ 650
of how you should set up your T-Accounts. Make sure you include
the T-Accounts. Please note, NOT ALL LINES WILL BE USED under
T-ACCOUNTS WILL BE USED.
ASSETS
Receivable Due From Owner Interest Receivab
11/30 $ - 11/30
$ 1,500
$ 1,400
$ 400
$ 700
plies Prepaid Advertisement Prepaid Insuranc
11/30 $ - 11/30
Dec 5 (i) $ 4,500 Dec 8 (ii)
$ 4,500
$ 35,000
$ 5,600
LIABILITIES
Dec 6 (i)
Dec 8 (i)
Dec 22
Dec 31
nvestments
$ -
STOCKHOLDER'S EQUITY
EXPENSES
$ 2,730
$ 2,550
$ 1,300
Instructions:
Using the ending balances in the T-Accounts from requirement (2), prepare a 12/31/08
unadjusted trial balance for Music Express (ME).
Please use the template below to prepare the unadjusted trial balance. NOT ALL LINES
ACCOUNTS WILL BE USED.
Music Express
Unadjusted Trial Balance
12/31/2008
Debit Credit
Cash $ 15,595
Accounts Recievable $ 10,925
Due From Owner
Interest Receivable
Other Receivables $ 750
Supplies $ 800
Prepaid Advertising $ 4,500
Prepaid Insurance $ 2,730
Prepaid Interest
Prepaid Rent
Music Equipment $ 35,000
Office Equipment
Vehicles $ 30,000
Accumulated Depreciation
Music Library $ 5,600
Accounts Payable $ 300
Due to Owner
Insurance Payable
Interest Payable
Rent Payable
Salaries Payable
Utilities Payable
Customer Deposits $ 2,550
Note Payable $ 47,500
Long-Term Investments
Common Stock $ 35,000
Dividend Paid to Owner $ 2,500
Retained Earnings
Service Fees Earned $ 25,300
Dividend Income
Interest Revenue
Advertising Expense $ 300
Amortization Expense
Depreciation Expense
Insurance Expense
Interest Expense
Miscellaneous Expense
Music Expense
Professional Fees $ 1,300
Rent Expense
Repair & Maintenance $ 650
Salaries Expense
Supplies Expense
Training & Development Expenses
Travel Expense
Utilities Expense
$ 110,650.00 $ 110,650.00
Points Earned
Total Points For Req. 3 (For Grading Purposes):
5 pts. 5 pts.
1 pts. pts.
2 pts. pts.
2 pts. pts.
Case 1-1: Requirement 4
Instructions:
For each account listed on the unadjusted trial balance prepared in requirement (3), identify the type of account (asset, liab
revenue, expense), and indicate whether it would be reported on the balance sheet or on the income statement. Consider
account balance is abnormal. (That is, determine whether an account balance that is expected to carry a debit balance but
and vice versa). If you determine that a particular account balance is abnormal, label it as such and explain what the abnorm
communicates.
If your team completed Requirement 3 correctly, the Unadjusted Trial Balance should be pulled from the Requirement 3 t
into the red box below. For each account on the Unadjusted Trial Balance, FILL IN AND COMPLETE THE TABLE TO THE RIGH
for each account as instructed above (if the account holds a value on the Unadjusted Trial Balance).
DO NOT Change Formulas Below. The numbers will be pulled from the Unadjusted Trial Balance in Req. 3
Music Express
Unadjusted Trial Balance
39813
Debit Credit
Cash $ 15,595
Accounts Recievable $ 10,925
Due From Owner
Interest Receivable
Other Receivables $ 750
Supplies $ 800
Prepaid Advertising $ 4,500
Prepaid Insurance $ 2,730
Prepaid Interest
Prepaid Rent
Music Equipment $ 35,000
Office Equipment
Vehicles $ 30,000
Accumulated Depreciation
Music Library $ 5,600
Accounts Payable $ 300
Due to Owner
Insurance Payable
Interest Payable
Rent Payable
Salaries Payable
Utilities Payable
Customer Deposits $ 2,550
Note Payable $ 47,500
Long-Term Investments
Common Stock $ 35,000
Dividend Paid to Owner $ 2,500
Retained Earnings
Service Fees Earned $ 25,300
Dividend Income
Interest Revenue
Advertising Expense $ 300
Amortization Expense
Depreciation Expense
Insurance Expense
Interest Expense
Miscellaneous Expense
Music Expense
Professional Fees $ 1,300
Rent Expense
Repair & Maintenance $ 650
Salaries Expense
Supplies Expense
Training & Development Expenses
Travel Expense
Utilities Expense
$ 110,650 $ 110,650
4
Balance in Req. 3
Instructions:
Using your unadjusted balances from requirement (3), calculate the following items as of 12/31/08:
a. Total dollar amount of ME's assets.
b. Total dollar amount of ME's liabilities.
c. Total equity (using the balance sheet equation).
d. The unadjusted net income (or net loss).
In order to earn credit, you must provide the name and dollar amount of the underlying accounts that
make up your answer (show all work in the boxes provided below).
Cash $ 15,595
Accounts Receivable $ 10,925
Other Receivable $ 750
Supplies $ 800
Prepaid Advertising $ 4,500
Prepaid Insurance $ 2,730
Music Equipment $ 35,000
Vehicles $ 30,000
Music Library $ 5,600
Total ME's Assets $ 105,900
Revenue $ 25,300
Less Expense:
Advertising Expense $ 300
Professional Fees $ 1,300
Repair & Maintenance $ 650
$ 2,250
Unadjusted Net Income $ 23,050
s of 12/31/08:
Points Earned
ying accounts that Total Points For Req. 5 (For Grading Purposes):
4 pts. 4 pts.
1 pts. pts.
1 pts. pts.
1 pts. pts.
1 pts. pts.
Case 1-1: Requirement 6
Instructions:
Using the balance you computed for total equity in requirement 5c, determine how much
of this balance is:
a. Total contributed capital.
b. Total retained earnings (there may be more than one approach).
In order to earn credit, you must provide the name and dollar amount of the underlying accounts that
make up your answer (show all work in the boxes provided below).
Proof:
unts that
ted + Earned
Case 1-1: Requirement 7
Instructions:
As of 12/31/08, how much money is owed to ME by its customers? On which financial
statement would this balance be reported?
Answer:
(from Requirement 3)
Points Earned
Total Points For Req. 7 (For Grading Purposes):
2 pts. 2 pts.
2 pts. pts.
Case 1-1: Requirement 8
Instructions:
Consider each of the liabilities identified in requirement 5(b) and comment on how the
liability will eventually be settled.
Customer Deposits:
In order to secure an event date, customers pay Ted a portion of the total event price up
front. Upon receiving this payment, Ted is obligated to the customer to either (i) return
the deposit, or (ii) provide DJ services on the date requested. Eventually, when Ted
performs his services he keeps the deposit and reduces the amount the customer owes
him for the event. Unlike the previous liabilities, this particular one will not be settled
with a cash payment, but with the performance of services.
Points Earned
Total Points For Req. 8 (For Grading Purposes):
3 pts. 3 pts.
3 pts. pts.
Case 1-1: Requirement 9
Instructions:
Consider the holiday gift that Ted treated himself to on 12/23 (Exhibit 1.2). Using the
accounts listed in Exhibit 1.1, provide at least two possible alternatives for the debit portions
of the resulting journal entry and explain how the economic entity assumption impacts your
choices. Given your two options, please clarify what additional information you would need
from Ted in order to determine which specific classification best captures the economic
reality of this situation.
The economic entity assumption is the notion that economic events should be identified with
a particular business entity. Further, the economic events of one entity should be kept separat
ee and not commingled with the economic events of another entity. Implicit in this
assumption is that the business owner is a separate entity from the business.
Here we have Ted, the owner of the business, using $2,500 of cash that belongs to the
business for personal purposes. Students often misunderstand the economic entity
assumption and believe they should ignore this event (as it involves a separate entity). Given
that $2,500 of business assets are now gone, clearly something must be recorded! Some
introductory students will jump to the conclusion that Ted is stealing or breaking the law. In
the small business context, situations such as this happen quite frequently as the sole owner
does not see a difference betwen himself and the business. What is important is that the
economic event is recorded accurately on the books so that it faithfully represents the
underlying transaction that occurs between the two separate entities. For starters, even
though this is an economic outflow, it should not be recorded as a "business expense" on
ME's books. If it were recorded in this manner, the economic entity assumption would be
violated!
There are two possiblities for how this cost could be classified given that the owner is
personally using assets belonging to the business. Specifically:
a. Ted will pay back the busness the $2,500, in which case it should increase the receivable
"due from owner".
b. (Our choice): Ted will not pay back the $2,500, in which case it should increase "dividend
paid to owner". This is no different than if Ted had been paid a $2,500 cash dividend and
then used the money to personally pay for the cruise.
Points Earned
Total Points For Req. 9 (For Grading Purposes):
4 pts. 4 pts.
4 pts. pts.
Grading Sheet - For Administration Use ONLY
1. Assume the role of accountant Justin Phillips and complete the requirements 1 - 6. To date, accountant Justin Phillips
He is now ready to prepare the December adjusting entries.
2. Your team is recommended to read through Case 1-1 tabs/answers before you begin Case 1-2. You MUST use the Gre
3. Your team are asked to refer to Exhibit 1.3, Exhibit 1.4, and Exhibit TN 1.1. Exhibit 1.3 and Exhibit 1.4 are included in t
given in Requirement 2.
4. ANY CHANGES TO THE LAYOUT OF THE TABS WILL RESULT IN A DEDUCTION OF POINTS. Do not change formulas alre
formulas to calculate your answers where formulas are not already in place. (e.g. using the Sumation/Addition/Subtracti
5. Questions: The TA's leading Case 1-2 will not be answering questions the day before and the day the case is due. Last
6. Participation: If a member on your team is not participating equally and/or fairly, it is ALL of the team members respo
case. Students who do not fully participate in the case will receive a deduction in the team's final case grade. Those who
7. The TA's In Charge: Robert Bauters (rbauters@purdue.edu) and David Valensi (dvalensi@purdue.com)
8. Submission: When you finish the case, please save the document with the proper Section and Group number. Pleas
Groups who do not save the file with the correct file name will receive a reduction in points.
structions
te, accountant Justin Phillips has assisted Ted by recording ME's December transactions.
e 1-2. You MUST use the Green Tabs below to complete the requirements.
d Exhibit 1.4 are included in the Case File (PDF). Exhibit TN 1.1 account balances are
Do not change formulas already in place but you are encouraged to enter your own
Sumation/Addition/Subtraction Formula(s) to total a T-Account).
the day the case is due. Last day for questions will be 10/22.
L of the team members responsibility to report this person to the TA's in charge of the
's final case grade. Those who do not participate at all will receive a zero for Case 1-2.
alensi@purdue.com)
Group #: 22
Instructions:
Determine which 12/31/08 account balances (Exhibit TN 1.1) require adjustment and prepare required adjusting entries. Pl
make all adjustments that are necessary in order to produce proper accrual basis financial statements.
Please use the account titles listed in Exhibit 1.1 for purposes for your entries. Do not create a new account.
Some dates will not require an entry and not all entries will use all of the lines available. For dates that do not require
any entries, enter "No Entry Required".
Jan 1 (iii)
No Entry Required
Jan 5 (i) a
No entry required
Jan 5 (i) d
No entry required
Jan 8 (ii)
No entry required
Jan 9
No entry required
Other adjustments not specifically mentioned:
Dec 31 Advertising Expense $ 850
Insurance Expense $ 185
Prepaid Advertising $ 850
Prepaid Insurance $ 185
Record the usage of Prepaid Assets
e required adjusting entries. Please
atements.
e a new account.
Points Earned
Total Points For Req. 1 (For Grading Purposes):
12 pts. 0.00 pts.
$ 16,720 $ 14,275
$ 750 $ 200
$ 30,000
$ 300
$ 2,200
STOCK
$ 35,000 $ 2,500
$ 30,700
$ 1,150
Interest Expense Miscellaneous Expenses
Dec 31 $ - Dec 31 $ -
Jan 1 (i) $ 115
$ 115
$ 2,200 $ 650
$ 35
Case 1-2: Requirement 2
ries from requirement (1) to "T" accounts and calculate the overall account balances as of
8 adjusted account balances for ME are given below as the beginning account balances.
of how you should set up your T-Accounts. Make sure you include
the T-Accounts. Please note, NOT ALL LINES WILL BE USED under
T-ACCOUNTS WILL BE USED.
ASSETS
Receivable Due From Owner Interest Receivab
Dec 31 $ - Dec 31
$ 3,650
$ 1,085 $ 5,379
LIABILITIES
$ 35 $ 6
$ 2,220 $ 775
nvestments
$ -
STOCKHOLDER'S EQUITY
REVENUES
EXPENSES
$ 1,306
us Expenses Music Expenses Professional Fee
Dec 31 $ - Dec 31
$ 2,220
$ 775
Total Points
For Req. 2
###pts.
Points Earned
(For Grading Purposes):
pts.
###
$ 2,545
$ 115
$ 1,900
$ 191
Professional Fees 1.04 pts. 0.00 pts.
$ 1,300
$ 1,300
$ 600
Instructions:
Use the ending balances in the "T" accounts from requirement (2) to prepare a 12/31/08 adjusted
trial balance for ME.
Please use the template below to prepare the unadjusted trial balance. NOT ALL
LINES/ACCOUNTS WILL BE USED.
Debit Credit
Cash $16,720
Accounts Recievable $14,275
Due From Owner
Interest Receivable
Other Receivables $750
Supplies $200
Prepaid Advertising $3,650
Prepaid Insurance $2,545
Prepaid Interest
Prepaid Rent
Music Equipment $35,000
Office Equipment $275
Vehicles $30,000
Accumulated Depreciation $1,085
Music Library $5,379
Accounts Payable $300
Due to Owner $35
Insurance Payable $6
Interest Payable $115
Rent Payable $2,200
Salaries Payable $2,220
Utilities Payable $775
Customer Deposits $1,900
Note Payable $47,500
Long-Term Investments
Common Stock $35,000
Dividend Paid to Owner $2,500
Retained Earnings
Service Fees Earned $30,700
Dividend Income
Interest Revenue
Advertising Expense $1,150
Amortization Expense
Depreciation Expense $1,306
Insurance Expense $191
Interest Expense $115
Miscellaneous Expense
Music Expense
Professional Fees $1,300
Rent Expense $2,200
Repair & Maintenance $650
Salaries Expense $2,220
Supplies Expense $600
Training & Development Expenses
Travel Expense $35
Utilities Expense $775
$121,836 $121,836
Points Earned
Total Points For Req. 3 (For Grading Purposes):
5 pts. 0.00 pts.
Instructions:
How would the 2008 and 2009 financial statements be different if Ted had instead chosen to use the cash-basis method of
accounting?
NOTE: Do not submit a complete set of cash-basis finanical statements. We want you to identify the differences between
methods (in general) and the key differences in certain accounts on Musical Express's Financial Statements. Please list at
account differences.
Please use the box below to answer the question above. If you need more space, please add more lines inside the box.
Cash Basis accounting only records transactions when cash is exchanged. That is, a company records its revenues when the
paid, and records its expenses when it pays for them. This way, a company's books will match the amount in its bank accoun
Accrual Basis accounting, on the other hand, records transactions in the time period that they occurred. Revenues are reco
when they are earned, and expenses are recorded when they are incurred or used up. This allows businesses to better estim
their net income by matching revenues to the expenses that occurred in the same time period. It is important to a using Ac
Based Accounting to separate its transactions into time periods, and accurately record the earning and expenses at the exac
of the exchange. The time period concept is not important in a Cash Basis system, and consequently would have created se
differences in the 2008 and 2009 financial statements if it was used by ME. For example, the balance sheet would look diffe
because certain accounts would not exist. Assets like prepaid insurance would never be opened because the entire cost of t
insurance would be expensed when purchased under Cash Basis Accounting. Under Accrual Basis Accounting, insurance is
expensed in increments, month by month, until the insurance has been used up. The income statement would also look diff
the coverage of the insurance had not been used up by the end of the period. Also, receivables and payables are not record
under cash basis accounting. 1) On Jan. 1st, we shall not record the insurance expense, if we use the ca
financial statements 2) On Jan. 2nd, we shall record $2760 salary expense rather than $2200, if we use the cash-basis fi
statements 3) On Jan. 5th, the utility bills of $525 and $250 would be expensed as a part of January, rather than Decemb
For Jan. 8th, Music Equipment, Music Library, and Vehicle would be recorded as assets purchased in December, and would
depreciated over their useful life.
he cash-basis method of
Instructions:
Which method (that is, accrual or cash-basis) provides a more meaningful and relevant picture for financial statement users
Explain using specific examples from ME to support your opinion.
Please use the box below to answer the question above. If you need more space, please add more lines inside the box.
Accrual Basis Accounting provides a more meaningful picture for financial statement users because it makes a more relevan
connection between revenues earned and expenses. For example, Jan. 8 describes an adjustment that accounts for the
depreciation of ME's Music Equipment and Vehicle and the Amortization of ME's Music Library under Accrual Basis Accoun
Cash Basis would not accrue those assets over time, despite the fact that ME is using them to earn revenue over many mon
to 36 months for the Music Equipment. The revenue will not be attached to the Depreciation expense. However, an Accrua
will accurately place the usage of those assets in the same time period that the assets were used to generate revenue, such
Dec. 13. This creates a more accurate Net income. Another example is the advertising purchased on Dec. 5. Cash Basis wou
record the transaction as an Advertising expense on Dec.5, but Accrual Basis would accrue the advertising as a Prepaid Adv
account, to be used up over the entire 90 day period that ME will use the advertising to generate revenue. Again, the Net in
distorted because expenses do not fully cover the time periods where revenue was earned from those expenses. Finally, M
salaries to its employees on Jan. 2, which included two days of work on Jan. 1 and 2. The work done on these two days cont
to revenue earned in January, while the rest of the days contriubte to revenue earned in December. Cash Basis Accounting w
record the transaction as a salary expense completely in January, which skews the income as it does not account for the sal
most of the month of December. In fact, Cash Basis Accounting is much worse at describing Net income, because expenses
may not be incurred at the same time as Revenue.
financial statement users?
Instructions:
Please consider the 12/31/08 adjusting entries you proposed in requirement (1) related to the interest incurred
on the $25,000 start-up loan and the insurance coverage for the new van. Taking into account your 12/31/08
adjustments for these two items, propose the entries that would be recorded by ME in January of 2009 at the
time of the cash payments. (Exhibit 1.3, Jan. 1, (i) and (iv)).
Please use the boxes below to answer the question above. Not all Adjusting Entry boxes may be needed to
answer the question.
Adjusting Entry:
1/1/2009 Note Payable $ 363
Interest Expense $ 115
Cash $ 478
Adjusting Entry:
1/1/2009 Insurance Expense $ 8
Prepaid Insurance $ 342
Cash $ 350
Insurance Interest = Price * 4 days / 180 days = 350 * 4 / 180 = 7.78, rounded to 8.
Prepaid Insurance = Price * 176 days / 180 days = 350 * 176 / 180 = 342.22.
rest incurred
12/31/08
009 at the
needed to
Points Earned
Total Points For Req. 3 (For Grading Purposes):
7 pts. 0.00 pts.
Group #: 22