Posted: April 14th, 2022

Computer Simulation Project

Champion Wave Surf, Inc.

1st Edition

Computer Simulation Project

STUDENT’S MANUAL

Adapted by Richard E Fleishman, MBA

From the original by

Stacey R. Adams, CPA

Champion Wave Surf, Inc.

Preface

Champion Wave Surf, Inc. is a computerized accounting project designed for students taking Financial Accounting. The project is intended to reinforce concepts taught in Financial Accounting courses, while allowing students the use of Wave Accounting software to aid in their understanding of computerized accounting.

The project is not intended to teach Wave Accounting, but simply uses Wave in a limited capacity to give students the opportunity to understand the usefulness of computers and software in the accounting world, but still compelling them to fully comprehend each accounting transaction and the accounting process.

Introduction

Background

Champion Wave Surf, Inc. is a small corporation, operated by Max Kolbe, the majority stockholder. The business opened on January 1, 2007, at its beautiful location in Morro Bay, California. Champion Wave has been successful in its first two months of operations, gaining popularity among the locals and tourists on the Central Coast. In addition to selling surfboards, accessories and apparel, Champion Wave also provides surfboard repair services and offers private surfing lessons.

As the new accounting intern for the company, you have been asked to complete the accounting for the last two weeks of March, prepare the financial statements and close the books at the end of the first quarter, March 31, 2007. This will require that you post all accounting transactions for the last two weeks of the month of March, reconcile the bank account, post any adjusting entries, print and analyze the financial statements, and, finally, post the closing entries. During the process, you are expected to audit your own work and make any correcting entries as you go. Max has provided you with the accounting files which have been completed through March 17, 2007.

Before you begin recording the transactions, it is important that you become familiar with Champion Wave’s chart of accounts and you thoroughly understand the company’s accounting procedures. Max has provided you with the complete chart of accounts along with some detailed information from his CPA that you should review.

Chart of Accounts

Homework help – Summary

ASSETS

101

Cash

102

Petty Cash

115

Certificate of Deposit

120

Accounts Receivable

125

Credit Cards Receivable

130

Interest Receivable

150

Merchandise Inventory

160

Prepaid Advertising

161

Prepaid Insurance

162

Prepaid Rent

170

Store Supplies

180

Equipment

181

Accumulated Depreciation, Equipment

185

Furniture & Fixtures

186

Accumulated Depreciation, Furniture & Fixtures

LIABILITIES

201

Accounts Payable

210

Dividends Payable

220

Interest Payable

240

Sales Tax Payable

250

Wages Payable

260

Unearned Revenue

280

Notes Payable

STOCKHOLDERS’ EQUITY

310

Common Stock

320

Retained Earnings

390

Dividends

REVENUE

401

Sales Revenue

410

Lesson Revenue

420

Repair Revenue

COST OF GOODS SOLD

501

Cost of Goods Sold

EXPENSES

601

Advertising Expense

605

Bank Charges

607

Cash Over / Short

610

Credit Card Processing Expense

612

Delivery Expense

615

Depreciation Expense, Equipment

616

Depreciation Expense, Furniture & Fixtures

620

Insurance Expense

625

Professional Fees

630

Rent Expense

635

Repairs & Maintenance

650

Salaries & Wages Expense

660

Store Supplies Expense

665

Telephone Expense

667

Utilities Expense

OTHER INCOME & EXPENSES

700

Interest Income

750

Gain on Disposal of Asset

800

Interest Expense

850

Loss on Disposal of Asset

Detail for Selected Accounts

ASSETS

101

Cash

This account is used for all cash and check transactions and includes amounts in the bank account and on hand at the store.

102

Petty Cash

This account is used for the small petty cash fund the company has established. The petty cash fund is $100 and is maintained on the imprest basis.

115

Certificate of Deposit

This account is used to record the company’s investment in the Certificate of Deposit (CD). The company put $8,000 into the CD on February 1, 2007. The CD has a 6% annual rate of interest and an 18 month term to maturity.

120

Accounts Receivable

This account is used to record amounts due from customers.

125

Credit Cards Receivable

This account is used to record amounts due from the credit card processing company when a customer pays via credit card. Approximately 2-3 days after a customer pays with a credit card, cash is received into the bank account, at which time the receivable should be relieved and the receipt of the cash should be recorded. The credit card processing company charges a 2.5% fee on each transaction and deducts the fee from the amount deposited to the bank account.

130

Interest Receivable

This account is used to record interest due to the company but not yet received.

150

Merchandise Inventory

This account is used to record all of the store’s inventory, including surfboards, accessories and apparel. All product costs, including transportation-in go into this account. The account is debited for purchases of inventory and credited following the sale of inventory. (See also: Cost of Goods Sold.)

160

Prepaid Advertising

This account is debited when advertising costs are paid more than one month in advance. The account is adjusted at the end of each month. Advertising services for the year have been paid in advance, totaling $1,500.00.

161

Prepaid Insurance

This account is debited when insurance premiums are paid more than one month in advance. The account is adjusted at the end of each month.

Insurance premiums for the entire year totaling $1,920.00 were paid in advance in January.

162

Prepaid Rent

This account is debited when rent is paid for a future month. The account is adjusted at the end of each month. Rent totaling $5,400.00 was paid in January for the first quarter of 2007.

170

Store Supplies

This account is used for the purchase of all store supplies. The account is adjusted at the end of each month to reflect the amount of supplies on hand and expense the supplies that have been consumed.

180

Equipment

This account is used to record the purchase of fixed assets. The company purchased $5,360.00 of equipment on January 1, 2007. The equipment has an expected life of 5 years. The salvage value is estimated to be $800.00.

185

Furniture & Fixtures

This account is used to record the purchase of fixed assets. The company purchased $4,532.00 of equipment on January 1, 2007. The furniture & fixtures have an expected life of 7 years. The salvage value is estimated to be

$500.00.

LIABILITIES

210

Dividends Payable

This account is used for dividends that are declared but not yet paid to stockholders.

240

Sales Tax Payable

This account is credited for sales tax collected from customers on all merchandise sales (surfboards, accessories and apparel). The sales tax rate is 7.75%. Sales tax is not charged for repair services or lessons. Sales tax remains payable until remitted to the State Board of Equalization at a later date.

260

Unearned Revenue

This account is used record payments from customers for lessons before revenue has been earned. When the revenue is earned, it should be debited from this account and recognized in the appropriate revenue account.

280

Notes Payable

This account is used to record amounts borrowed from the bank and other sources of financing from creditors. The company borrowed $30,000.00 at 8.5% from Central Coast Credit Union on January 1, 2007.

REVENUE

401

Sales Revenue

This account is used to record the sale of merchandise (surfboards, accessories or apparel) to customers.

410

Lesson Revenue

This account is used to record revenue from teaching surfing lessons. Customers are charged a rate of $50.00 per hour for lessons. Customers can pay in advance for 10 hours of lessons for only $450.00. Revenue should not be recognized until it is earned.

420

Repair Revenue

This account is used to record revenue from surfboard repairs.

COST OF GOODS SOLD

501

Cost of Goods Sold

This account is debited for the cost of merchandise sold. All merchandise is sold at a 100% mark-up over its cost. Each merchandise sales transaction should be followed by an entry debiting this account and crediting Merchandise Inventory.

EXPENSES

601

Advertising Expense

This account is used for advertising expenses incurred in the current month. Advertising costs paid in advance should be debited to Prepaid Advertising.

607

Cash Over / Short

This account is used for small, immaterial discrepancies, usually arising in relation to petty cash transactions.

610

Credit Card Processing Expense

This account is used to record fees related to accepting payment from customers via credit card. The credit card processing company charges a 2.5% processing fee on each transaction, which is deducted from the amount deposited to the bank account. There is an additional monthly fee that gets recorded at the end of the month from data on the bank statement.

612

Delivery Expense

This account is used to record costs incurred when shipping merchandise to customers. This could also be called “transportation-out.”

615

Depreciation Expense, Equipment

This account is used to record depreciation adjustments. Depreciation expense is calculated using the straight-line method and is recorded monthly.

616

Depreciation Expense, Furniture & Fixtures

This account is used to record depreciation adjustments. Depreciation expense is calculated using the straight-line method and is recorded monthly.

620

Insurance Expense

This account is used to record adjustments for insurance expiring in the current month. Insurance premiums paid in advance should be debited to Prepaid Insurance.

630

Rent Expense

This account is used for rent in the current month. Rent paid in advance should be debited to Prepaid Rent.

Accounting Methods

Accrual Basis

The company uses the accrual basis of accounting. Adjusting entries are made monthly in order to recognize revenues and expenses in the appropriate month.

Depreciation

The company depreciates assets using straight-line depreciation. Depreciation is recorded monthly.

Inventory

The company uses the perpetual inventory method, updating the Merchandise Inventory and Cost of Goods Sold accounts after each sales transaction. Inventory is sold at a 100% mark- up over its cost. Each merchandise sales transaction should be followed by an entry debiting Cost of Goods Sold and crediting Merchandise Inventory (for 50% of the amount of the sale).

Purchase Discounts

The company uses the gross method to record purchase discounts, meaning that it records inventory purchases at the gross price (list price). If the company does not make payment to the vendor in time to receive the discount, there is no additional entry or calculation necessary. However, if the company makes payment within the discount period, the Inventory and Accounts Payable accounts each should be reduced for the amount of the discount.

Returns & Allowances

The company does allow sales returns on occasion. Sales returns are debited from the related sales account directly and Sales Tax Payable gets adjusted. The merchandise then needs to be received back into inventory and removed from Cost of Good Sold (as it is no longer sold!). Just as there are two journal entries necessary when recording the sale of

merchandise, there will be two entries needed to reverse the sale.

Champion Wave Surf, Inc.

Set-up & Instructions

1. Open your browser and go to www.waveapps.com. In the middle of the page you will see a “Start Now” button. This will take you into the registration and download process.

2. On the opening page you will be asked to give your name, business name, and what your business does. Your business is Champion Wave, Inc and it is a retailer.

3. Choose “Manage your accounting”.

4. You currently do your accounting manually, on your own, don’t need to run payroll, you are a Sole Proprietor.

5. At this point choose “Manage Transactions” and you are ready to start.

6. You may have to add an account or two as you go. To do this:

a. Click on Accounting>Chart of Accounts

b. Select “Add A New Account” in the upper right corner

c. Fill out the information and click “Save”

Data Entry

In Wave Accounting, you will only be entering General Journal Entries (called “transactions” in Wave) to post data. While there are other methods of entry in the software, the purpose of your accounting internship with Champion Wave Surf, Inc. is to demonstrate your knowledge of accounting, which is best done through posting journal entries for each transaction and adjustment.

1) To begin, with the company file open, click on “Accounting” from the menu bar down the left side of the screen, then select “Transactions.” This will open the transactions screen that will show all of the transactions that have been entered.

2) In the upper right-hand corner click on “More”, then “Add journal transaction”. Use the tab key to move from field to field.

3) A window will open on the right enter a brief description including the number in BOLD included in the instructions, then the date.

4) Next are two fields for the debits/credits of the transaction. Each description field has a drop-down menu in order to enter the appropriate account. If you enter the first few letters of the account you want, it will show in the window. Tab to enter the amount of the debit. Tab again for the credit. If you have more than one debit or credit, there are two buttons below the transactions, one to add a debit another for a credit. Add as many as you need. In the description field enter a simple description of the reason for the entry. When all is good, click on save and move to your next entry.

5) The first entries are the ending balances for February 28, 2007. You will find these on the next page.

6) Next, enter the adjustment for March 17, 2007 Which follows the previous entry. You now have a tied-out balance through March 17th. Your job is to enter the remaining entries for the third and fourth weeks.

7) If a transaction refers to a prior entry from week one or two, you will have to look in the instructions, find the entry, and calculate the data you need for the transaction. There aren’t many, thankfully.

8) You are now ready to begin the week three transactions.

Corrections

1) Begin by identifying the journal entry that needs to be corrected. You will need to completely reverse that entry, so you may want to write down or print out the details of the transaction (account(s) debited / credited and respective amounts).

2) Start a new journal entry and post the “reversal” of your incorrect entry. Using the date of the original entry, you will debit the account(s) you originally credited and credit the account(s) you originally debited. You should include “Reversal of ERROR” in the memo field.

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