Chapter 11, Problem 20E

1.

To determine

Calculate cash paid for operating expense.

Explanation of Solution

Operating expenses: The expenses which are incurred in day-to-day business activities but not directly allied with the production of goods and service are called operating expenses. They are classified under three big categories: “administrative expenses, selling expenses, and general expenses”.

Calculate cash paid for operating expenses.

Situation	Operating expenses	Prepaid insurance Increase (Decrease)	Salaries payable Increase (Decrease)	Cash paid for operating expenses
1	$100	$15	$10	(1) $105
2	$100	($15)	$10	(2) $75
3	$100	$15	($10)	(3) $125
4	$100	($15)	($10)	(4) $95

Table (1)

Working note:

Calculate amount of cash for operating expenses in each situation:

Situation 1:

$\begin{array}{c}\text{Cash paid for operating expenses}=\left(\begin{array}{l}\text{Operating expenses}+\text{Increase in prepaid insurance}-\\ \text{Increase in salaries payable}\end{array}\right)\\ =\$100+\$15-\$10\\ =\$105\end{array}$ (1)

Situation 2:

$\begin{array}{c}\text{Cash paid for operating expenses}=\left(\begin{array}{l}\text{Operating expenses}-\text{Decrease in prepaid insurance}-\\ \text{Increase in salaries payable}\end{array}\right)\\ =\$100-\$15-\$10\\ =\$75\end{array}$ (2)

Situation 3:

$\begin{array}{c}\text{Cash paid for operating expenses}=\left(\begin{array}{l}\text{Operating expenses}+\text{Increase in prepaid insurance}+\\ \text{Decrease in salaries payable}\end{array}\right)\\ =\$100+\$15+\$10\\ =\$125\end{array}$ (3)

Situation 4:

$\begin{array}{c}\text{Cash paid for operating expenses}=\left(\begin{array}{l}\text{Operating expenses}-\text{Decrease in prepaid insurance}+\\ \text{Decrease in salaries payable}\end{array}\right)\\ =\$100-\$15+\$10\\ =\$105\end{array}$ (4)

2.

To determine

Prepare the summary journal entry for each situation.

Explanation of Solution

Prepare the summary journal entry for each situation.

Situation 1:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Operating expenses	100
	Prepaid insurance	15
	Salaries payable		10
	Cash		105
	(To record the summary journal entry)

Table (1)

• Operating expenses is an expense account and it decreases the stockholders’ equity. Hence, debit Operating expenses with $100.
• Prepaid insurance is an asset account and it is increased. Hence, debit prepaid insurance with $15.
• Salaries payable is a liability account and it is increased. Hence, credit salaries payable with $10.
• Cash is an asset account and it is decreased. Therefore, credit cash with $105.

Situation 2:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Operating expenses	100
	Prepaid insurance		15
	Salaries payable		10
	Cash		75
	(To record the summary journal entry)

Table (2)

• Operating expenses is an expense account and it decreases the stockholders’ equity. Hence, debit Operating expenses with $100.
• Prepaid insurance is an asset account and it is decreased. Hence, credit prepaid insurance with $15.
• Salaries payable is a liability account and it is increased. Hence, credit salaries payable with $10.
• Cash is an asset account and it is decreased. Therefore, credit cash with $75.

Situation 3:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Operating expenses	100
	Prepaid insurance	15
	Salaries payable	10
	Cash		125
	(To record the summary journal entry)

Table (3)

• Operating expenses is an expense account and it decreases the stockholders’ equity. Hence, debit Operating expenses with $100.
• Prepaid insurance is an asset account and it is increased. Hence, debit prepaid insurance with $15.
• Salaries payable is a liability account and it is decreased. Hence, debit salaries payable with $10.
• Cash is an asset account and it is decreased. Therefore, credit cash with $125.

Situation 4:

Date	Accounts title and explanation	Debit ($)	Credit ($)
	Operating expenses	100
	Salaries payable	10
	Prepaid insurance		15
	Cash		95
	(To record the summary journal entry)

Table (4)

• Operating expenses is an expense account and it decreases the stockholders’ equity. Hence, debit Operating expenses with $100.
• Salaries payable is a liability account and it is decreased. Hence, debit salaries payable with $10
• Prepaid insurance is an asset account and it is decreased. Therefore, credit prepaid insurance with $15.
• Cash is an asset account and it is decreased. Therefore, credit cash with $95.