Internal Control and Cash

(1)

Solutions Manual for Chapter 9 741

Chapter 9 Internal Control and Cash

Questions

1. Most liquid is cash. Least liquid is a building.

2. Ensure transactions and activities are authorized, maintain records, insure assets, bond employees, separate recordkeeping and custody, establish separation of duties, apply technological controls, and perform internal and external audits.

3. Separation of custody from recordkeeping encourages the custodian to avoid misplacing, misappropriating, or wasting the asset. This arrangement makes collusion necessary if an asset is to be stolen and the theft concealed in the records.

4. Internal control procedures become critical when the manager of a business can no longer control the business through personal supervision and direct participation in its affairs.

5. Responsibility for a sequence of related transactions should be divided so that the work of one department or individual acts as a check on that of another.

6. Depositing all receipts intact on the day of receipt creates an independent record of the amount of cash received and helps prevent an employee from having personal use of the money for a few days before depositing it.

7. If department managers were permitted to deal directly with the suppliers, the amount of merchandise purchased and the resulting liabilities would not be well controlled. Having department managers place orders through a purchasing department helps control the amounts purchased and the resulting liabilities.

8. A petty cash receipt is a document stating that a payment has been made from petty cash. The person who received payment signs the receipt.

9. $29,329,000.

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Quick Study 9-1

a. The main objective of internal control is to safeguard the assets of the business. This objective is best accomplished by designing an operational system with managerial policies that protect the assets from waste, fraud and theft. The system should be designed in compliance with the seven broad principles of internal control.

b. The separation of recordkeeping from the custody over assets is intended to reduce fraud. If this fundamental principle is followed, there has to be collusion between two or more employees for assets to be stolen and the theft to be concealed in the records.

c. Your supervisor’s lack of concern is suspicious. The supervisor had control over both the custody and recording of bus passes; this lack of separation of duties represents poor internal controls. You have identified 1,251 (9820 – 9750 = 71; 11750 – 11012 = 739; 22440 – 22000 = 441) missing bus passes at $50 each for a total value of $62,550. You have an obligation to report this irregularity to both your work experience advisor at the college and your supervisor’s superior since your supervisor is not willing to deal appropriately with the issue.

Quick Study 9-2

a. The basic guidelines for safeguarding cash are: (1) to separate the duties of those who handle cash and those that keep cash records, (2) require that receipts be deposited intact daily, and (3) require that all disbursements are made by cheque. b. The organization may be small and the separation of duties may be difficult.

However, wherever possible, tasks should be segregated. Also, periodic checks should be made by an independent party to ensure procedures are being followed. Members could deposit their collections directly (no withdrawal privileges) and report the details to the recordkeeper. Restrictions could be placed on the bank account such that withdrawals can be made only via a cheque requiring two signatures to ensure cheques are being written for authorized expenditures only.

(3)

Quick Study 9-3 1.

May 1 Petty Cash ... 75.00

Cash... 75.00 To record establishment of fund.

2.

Wee Ones Agency Petty Cash Payments Report

May 1 – 31, 2005

Receipts: Entertainment expense

Film rentals... $19.40 Refreshments for meeting ... 22.81 $42.21 Postage expense ... 6.95

Printing expense... 13.10

Total receipts... $62.26 Fund total... $75.00

Less: Cash remaining... 12.74

Equals: Cash required to replenish petty cash... 62.26 Cash over/(short) ... $ -0-

May 31 Entertainment Expense... 42.21 Postage Expense... 6.95 Printing Expense ... 13.10

Cash... 62.26 To reimburse the fund.

3. The Petty Cash account is credited when the size of the fund is being reduced or the fund is being eliminated.

Quick Study 9-4

Mar. 17 Printing Expense ... 75.00 Taxi Expense... 48.00 Delivery Expense... 55.00

Cash Over and Short... 3.00

Cash... 181.00 To record establishment of fund.

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Sept. 23 Entertainment Expense... 32.00 Computer Repair Expense... 45.00

Delivery Expense ... 18.00 Cash Over and Short... 2.00 Cash ... 93.00 To record establishment of fund.

Quick Study 9-6

Feb. 1 Cash... 73,125 Credit Card Expense ... 1,875

Sales... 75,000 To record sale of merchandise less credit card expense;

75,000 x 2.5% = 1,875.

1 Cost of Goods Sold... 62,000

Merchandise Inventory... 62,000 To record cost of sales.

10 Cash... 28,000 Sales... 28,000

To record sale of merchandise to cash customers.

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Quick Study 9-7

Oct. 1 Cash... 13,965 Debit Card Expense ... 35

Sales... 14,000 To record sale of merchandise less debit card

expense 14,000 x ¼% = 35.

7 Cash... 3,500 Sales... 3,500

To record sale of merchandise to cash

customers.

Quick Study 9-8

Part 1 Part 2 a. Bank; add —

b. Book; add JE required c. Book; add JE required d. Book; subtract JE required e. Bank; subtract — f. Book; subtract JE required g. Book; subtract JE required *Quick Study 9-9

Company A’s Acid-test Ratio Company B’s Acid-test Ratio 1,200 + 2,700 = 1.16 1,200 + 2,700 = 0.68

3,100 + 250 4,750 + 950 Company A would be granted credit

because the acid-test ratio is greater than 1.

Company B would not be granted credit because the acid-test ratio is less than 1 indicating possible liquidity problems.

(6)

Exercise 9-1 (10 minutes)

Lombard Company’s internal control system failed to require a separation of asset custody and recordkeeping. The bookkeeper should not have been allowed to sign the company’s cheques. In addition, since a loss was incurred, the company apparently had not bonded its employee. Otherwise, the loss would have been insured by the bonding company. Finally, if regular, independent reviews of the accounting records had been done, the payments of salary cheques to a nonemployee may have been discovered sooner.

You have several concerns. First, there is no mechanism in the parking meters to track the input of coins (a meter reading that could be documented and subsequently verified against the collection); this means there is no verifiable means by which to reconcile the contents of each meter. Second, because of the first shortcoming, the employee emptying the contents of the meters could withhold some of the coins since the dollar value cannot be verified. Third, the canvas bag is not secure; it can be opened at any time by an unauthorized individual. Fourth, after emptying several parking meters, the contents of each canvas bag can easily exceed a thousand dollars; there is a safety risk to a lone employee carrying a canvas bag of money.

To correct the situation, optimally, the parking meters should be mechanized such that the contents can be reconciled. However, a major investment in new parking meters seems unlikely, therefore, civic employees collecting coins from parking meters should operate in pairs; there is less risk of fraud if two employees are responsible for emptying the parking meters (unless there is collusion). The canvas bag used to collect the coins is also problematic. It should be redesigned so that coins can go in but cannot be removed unless done so by an authorized individual. Finally, for safety of the individuals involved and for security over the coins, full moneybags should not be stored in an unattended vehicle. Full moneybags should be transferred to a secure location immediately; arrangements could be made with an armored vehicle to rendezvous with the pair of employees regularly at specified points along the route.

(7)

a. If a cash register cannot be used, the total sales value of the shirts and sunglasses given to the employee each day should be calculated. Then, the employee should sign a receipt for the merchandise and the amount of cash that he or she has been given. At the end of each day, the employee should be required to return cash plus remaining shirts and sunglasses equal to the amount taken to the stand.

b. The employee should sign a receipt for the total amount of cash he or she is given each weekend. Then, each time the employee makes a purchase, he or she should obtain a signed sales receipt for the payment. The sales receipt should list the items purchased and the prices paid. When the employee returns to the business office, the total value of the signed sales receipts plus any remaining cash should equal the amount of cash originally given to the employee. Also, the merchandise brought back by the employee should be the same as the items listed on the signed sales receipts. Exercise 9-4 (15 minutes)

The internal control problem is that the bookkeeper has physical control over the cash receipts and also has control over the accounting records. Nothing in the system prevents the bookkeeper from taking cash from the mail and using it personally. The bookkeeper might delay recording the cash receipt from a customer until more cash comes in at a later date from a second customer. Then, the new cash receipt would be deposited and recorded as a payment made by the first customer. No entry would be made in the second customer’s account until cash was received from a third customer. (This type of fraud is called “lapping.”) Also, the bookkeeper may pocket cash and claim that a payment was never received and apparently lost in the mail.

If only one person is present when the mail is opened, that person may steal cash and claim it was never received. If possible, two people should be present. Otherwise, the honesty and integrity of the person chosen to open the mail is critical. Most importantly, the bookkeeper should not have physical control over cash.

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Part 1 a.

Jan. 1 Petty Cash... 200.00

Cash ... 200.00 To establish the fund.

b.

Eanes Co.

Petty Cash Payments Report January 1 – 8, 2005

Receipts: Postage expense ... $64.00

Merchandise inventory... 19.00 Store supplies... 36.50

Jim Eanes, Withdrawals... 53.00

Equals: Cash required to replenish petty cash... 172.50 Cash over/(short) ... $ -0-

Jan. 8 Postage Expense... 64.00 Merchandise Inventory ... 19.00 Store Supplies ... 36.50

Cash ... 172.50 To reimburse the fund.

Part 2

Jan. 8 Postage Expense... 64.00 Merchandise Inventory ... 19.00 Store Supplies ... 36.50

Petty Cash... 300.00

Cash ... 472.50 To reimburse the fund and increase it by $300.

Part 3

If the January 8 entry to reimburse the fund was not recorded, net income would be overstated.

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Exercise 9-6 (20 minutes) a.

Sept. 9 Petty Cash... 400.00

b.

Brady Company

Petty Cash Payments Report September 9 – 30, 2005 Receipts: Merchandise inventory ... $ 32.45 Office supplies... 113.55 Repairs expense ... 87.60 Total receipts... $233.60) Fund total... $400.00

Equals: Cash required to replenish petty cash... 235.75) Cash over/(short) ... ($ 2.15)

Sept. 30 Merchandise Inventory ... 32.45

Office Supplies ... 113.55 Repairs Expense ... 87.60

Petty Cash ... 100.00 Cash ... 135.75

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a.

Oct. 31 Cleaning Expense ... 120.00 Postage Expense ... 79.00 Delivery Expense ... 60.00

Cash Over and Short ... 4.00 Cash ... 255.00 To reimburse the fund.

b.

Nov. 30 Computer Repair Expense ... 75.00 Entertainment Expense ... 156.00 Cash Over and Short ... 2.00

Cash ... 233.00 To reimburse the fund.

c.

Dec. 31 Gas Expense ... 80.00 Office Supplies... 140.00 Entertainment Expense ... 62.00 Petty Cash ... 100.00

Cash ... 382.00 To reimburse and increase the fund.

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Oct. 1 Cash... 104,475 Debit Card Expense ... 525

expense; 0.5% x 105,000 = 525.

7 Cash... 37,000 Sales... 37,000

To record sale of merchandise to cash

customers.

8 Cash... 59,780 Credit Card Expense ... 1,220

Sales... 61,000 To record sale of merchandise less credit card

expense; 2% x 61,000 = 1,220.

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a.

Jan. 15 Cash... 56,000

Sales... 56,000 To record sale of merchandise to cash customers.

17 Accounts Receivable ... 15,800 Sales... 15,800

To record sale of merchandise on terms 2/10, n30.

20 Cash... 111,720 Credit Card Expense ... 2,280

Sales... 114,000 To record sale of merchandise less credit card

expense; 114,000 x 2% = 2,280.

25 Cash... 71,640 Debit Card Expense... 360

expense; 0.5% x 72,000 = 360.

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Exercise 9-9 (concluded)

b. Cash sales would be preferable, however, often it is not convenient for customers. The inconvenience of cash might prevent customers from making purchases if that was the only means of payment accepted by LenCon. Credit sales allow customers to purchase on impulse. However, two disadvantages: receipt of cash by LenCon is delayed and credit sales require administrative time to monitor the timely collection from credit customers. Debit cards have the advantage of allowing customers to make impulse purchases but only if the cash balance is available in their bank account. Debit cards are also comparable to cash (no subsequent collection required) but the bank does charge a fee for this service although it is normally significantly less than the fee charged by banks for credit card transactions. Bank credit cards have the advantages of cash being collected by LenCon immediately (positive effect on cash flow) and customers are limited only to their credit card limit (not their bank account balance); customers are buying on credit but the risk of collection is transferred to the credit card company. The disadvantage of credit cards is the fee charged by the administering bank. LenCon will likely accept all forms of payment to enhance sales and in so doing recognize the costs and risks of each.

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1.

JENSTAR HOLDINGS Bank Reconciliation

July 31, 2005

Bank statement balance... $4,924 Book balance ... $4,870 Add:

Outstanding deposit ...

Bank error (JenCo cheque)... 280 286

$5,490 Deduct: Outstanding cheques: #14: $ 600 #54: 140... 740 Deduct: NSF — Jim Anderson... 120

Adjusted bank balance... $4,750 Adjusted book balance ... $4,750

2.

July 31 Accounts Receivable – Jim Anderson ... 120

Cash... 120 To reinstate customer account.

3. If the journal entries in (2) are not recorded, net income, liabilities and owner’s equity would not be affected. Assets would be increased and decreased by the same amount causing a net change of zero.

MEDLINE SERVICE CO. Bank Reconciliation

July 31, 2005

Bank statement balance ... $10,332 Book balance of cash ... $11,352 Add:... Add:

Deposit of July 31... 2,724 Error on Ch. No. 919... 9

$13,056 $11,361

Deduct:... Deduct:

Outstanding cheques... 1,713 Bank service charge... 18 Adjusted bank balance... $11,343 Adjusted book balance... $11,343

(15)

a.

July 31 Cash... 9

Utilities Expense ... 9 To correct error.

31 Bank Service Charges Expense... 18

Cash ... 18 To record bank service charges.

b. If the journal entries in part (a) were not recorded, net income, assets, and owner’s equity would each be overstated by a net amount of $9 ($18 - $9 = $9); liabilities are not affected by the entries in (a).

(16)

Not Shown

Bank Balance Book Balance on the

Must Reconcil-

Add Deduct Add Deduct Adjust iation 1. Interest earned on the account. x Dr. 2. Deposit made on September 30

after the bank was closed. x

3. Cheques outstanding on August 31 that cleared the bank in September. x 4. NSF cheque from customer returned on September 15 but not recorded by the company. x Cr. 5. Cheques written and mailed to payees on September 30. x 6. Deposit made on September 5 that was processed on September 8. x 7. Bank service charge. x Cr. 8. Cheques written and mailed to

payees on October 5. x 9. Cheque written by another

depositor but charged against the company's account. x 10. Principal and interest collected by the bank but not recorded by the company. x Dr. 11. Special charge for collection of note in No. 10 on company's behalf. x Cr. 12. Cheque written against the account and cleared by the bank; erroneously omitted by the bookkeeper. x Cr.

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*Exercise 9-14 (15 minutes)

Case X Case Y Case Z

Cash... $ 800 $ 910 $1,100 Short-term investments ... -0- -0- 500 Accounts receivable... -0- 990 800 Quick assets ... $ 800 $1,900 $2,400 Current liabilities ... $2,200 $1,100 $3,650 Acid-test ratio ... 0.36 1.73 0.66 Case Y exhibits the superior ability to meet short-term obligations as they come due. The acid-test ratio of 1.73 exceeds the common benchmark of 1.0. Cases X and Z fall short of the 1.0 benchmark.

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Problem 9-1A (20 minutes)

1. Violates the principle of establishing responsibility. Only Jill should have access to the petty cash fund since she is the custodian. The company should implement a policy of not allowing petty cash transactions over the lunch hour.

2. Violates applying technological controls. While the daily backup is a very good internal control the tape needs to be taken off the premises every night. If the building and computer are destroyed the data will be able to be restored from the tape that was kept safe off the premises. The company should implement a policy of storing tapes off the premises nightly.

3. Violates regular and independent review. Jack Mawben needs to implement a way to regularly and independently review his employees. Hiring of internal auditors or an outside consultant to objectively review the internal controls and employee’s work needs to be implemented.

4. Violates insuring of assets and bonding of key employees. We do not have enough information to know if the company can afford the move to the higher deductible on the property insurance. However, we can say that dropping the insurance for bonding the employees weakens internal control. If the company does need to engage in cost cutting they should do it without compromising their internal controls. The insurance for the bonding of key employees should be reinstated.

5. Violates separation of duties. The company should implement a policy whereby the person recording incoming cash receipts is not responsible for posting the payment to the customer accounts.

(19)

Problem 9-2A (30 minutes) Part 1

Feb. 2 Petty Cash... 300

Cash ... 300 To establish the fund.

Part 2

PALLADIUM ART GALLERY Petty Cash Payments Report

February 2 – 28, 2005

Receipts: Delivery expense

Feb. 23 Delivery of customer’s

merchandise... $18.00 Auto expense

Feb. 14 Reimbursement for travel... 58.00 Postage expense

Feb. 12 Express delivery of contract ... $ 9.95

28 Purchased stamps ... 64.00 73.95 Transportation-in (Merchandise Inventory)

Feb. 9 COD charges on purchased

merchandise... $22.50 25 COD charges on purchased

merchandise... 15.10 37.60 Office supplies

Feb. 5 Purchased paper for copier... $10.13

20 Purchased stationery ... 77.76 87.89

Equals: Cash required to replenish petty cash... 278.77 Cash over/(short) ... ($ 3.33)

(20)

Part 3

Feb. 28 Delivery Expense... 18.00

Auto Expense... 58.00 Postage Expense... 73.95 Merchandise Inventory ... 37.60 Office Supplies ... 87.89

Petty Cash... 100.00

Cash ... 378.77 To reimburse fund and increase it by $100.

Part 4

If the entry in Part 3 was not recorded, assets and owner’s equity would be overstated by a net amount of $153.28 ($37.60 + $87.89 + $100 – $378.77 = $153.28); liabilities would not be affected.

(21)

Problem 9-3A (20 minutes) Part 1

Apr. 1 Petty Cash... 250.00

Cash ... 250.00 To establish fund. 15 Advertising Expense... 57.15 Janitorial Expense... 78.00 Postage Expense... 43.50 Office Supplies ... 63.68 Petty Cash... 200.00

Cash Over and Short ... 3.48 Cash ... 438.85

To reimburse fund and increase it by $200.

30 Delivery Expense... 39.75 Auto Expense ... 28.50 Office Supplies ... 48.36

Petty Cash ... 50.00 Cash ... 66.61

To reimburse fund and decrease it by $50. Part 2

If the April 30 replenishment is not made and no entry is recorded, several expenses would not be recognized and net income and owner’s equity would be overstated by $116.61 ($48.36 + $28.50 + $39.75). Similarly, the petty cash asset and total assets would be overstated by $116.61.

Even though the April 30 entry shows a debit to Office Supplies instead of Office Supplies Expense, the expense would turn out to be understated without this entry. This result occurs because the expense equals the difference between the unadjusted Office Supplies account balance and the count of office supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supplies expense will be understated.

(22)

a.

DARTMOUTH COMPANY Bank Reconciliation

June 30, 2005

Bank statement balance... $ 8,379.34 Book balance ... $4,941.69

Add: Add:

Deposit of June 29... 2,220.85 Error, cheque no. 887 .. 1,000.00 10,600.19 Error, cheque no. 891 .. 100.00

Deduct: $6,041.69

Outstanding cheques:

No. 888 ... 1,186.30 Deduct:

No. 890 ... 1,146.40 Bank service charges.. 45.70 No. 892 ... 1,106.70

No. 893 ... 1,164.80 4,604.20

Adjusted bank balance... $ 5,995.99 Adjusted book balance... $5,995.99

b.

June 30 Cash... 1,000.00

Office Supplies... 1,000.00 To account for error in Cheque #887.

30 Cash... 100.00

Utilities Expense ... 100.00 To account for error in Cheque #891.

30 Bank Service Charge Expense... 45.70

Cash ... 45.70 To record bank service charges for June.

c. Net income, assets, and owner’s equity would each be understated by $54.30

(23)

Problem 9-5A (30 minutes) a)

PRIMETECH ELECTRONICS Bank Reconciliation

April 30, 2005

Bank statement balance... $23,452 Book balance... $21,458

Add: Interest revenue... $47 Error Chq #93... 99 146 $21,604 Deduct: Deduct: Outstanding cheques: NSF... $412 #79... $2,600 Payment... 2,100 #91... 400 Interest Expense... 320 #96... 320 Service Charge... 40 2,872 #100... 1,400 _4,720

Adjusted bank balance... $18,732 Adjusted book balance... $18,732

b)

Apr. 30 Cash... 47

Interest Revenue... 47 To record interest earned.

30 Cash... 99

Delivery Expense ... 99 To account for error in Cheque #93.

30 Accounts Receivable – Jon Smith... 412

Cash ... 412 To reinstate customer account.

30 Loan Payable ... 2,100

Cash ... 2,100 To record April loan payment.

30 Interest Expense... 320

Cash ... 320 To record April interest expense.

Cash ... 40 To record April bank charges.

(24)

ARCHDALE COMPANY Bank Reconciliation

October 31, 2005

Bank statement balance... $28,020 Book balance of cash ... $26,193

Add: Add:

Deposit of October 31... 10,152 Proceeds of note less collection charge

$38,172

($9,000 – $45) ... 8,955

$35,148

Deduct: Deduct:

Cheques No. 3031 ... $1,380 NSF cheque and fee —

3065 ... 336 Jefferson Tyler ... $805

3069 ... 2,148 3,864 Service charge... 15 Error recording Cheque

No. 3056 ... 20 840 Adjusted bank balance... $34,308 Adjusted book balance... $34,308

(25)

Problem 9-6A (concluded) Part 2

Oct. 31 Cash... 8,955

Collection Expense ... 45 Notes Receivable ... 9,000

To record collection of note less collection fee.

31 Accounts Receivable—Jefferson Tyler... 805

Cash ... 805 To record NSF cheque.

31 Rent Expense... 20

Cash ... 20 To correct error.

Part 3

a. If the company’s Cash account balance of $26,193 is listed on the bank reconciliation as $26,139, the final balance that results from adjusting the bank statement balance will not be affected by the error. However, the final balance that results from adjusting the book balance of cash will be understated by $54 ($26,193 – $26,139). b. The bank’s collection of a $9,000 note less the $45 collection fee should have been

added to the book balance of cash. Instead, it was added to the bank statement balance. As a result, the final balance that results from adjusting the bank statement balance will be overstated by $8,955 and the final balance that results from adjusting the book balance will be understated by $8,955. Therefore, the totals will be out by $17,910 because, if it is on the wrong side, it has a doubling effect.

(26)

WALBURG COMPANY Bank Reconciliation

September 30, 2005

Bank statement balance... $18,363.55 Book balance of cash ... $17,537.50 Add: Add:

Deposit of September 30 ... 1,582.75 Interest earned... 22.50 Proceeds of note less

$19,946.30 collection fee ... 1,385.00

$18,945.00

Deduct: Deduct:

Cheques No. 5893 .... $484.25 NSF cheque —

5906 .... 859.30 Delia Hahn... $588.25 5908 .... 276.00 1,619.55 Error on Cheque

No. 5904... 30.00 618.25 Adjusted bank balance $18,326.75 Adjusted book balance... $18,326.75 Part 2

Sept. 30 Cash... 22.50

Interest Revenue... 22.50 To record interest earned.

30 Cash... 1,385.00 Collection Expense ... 15.00

Notes Receivable ... 1,400.00 To record collection of note less collection fee.

30 Accounts Receivable—Delia Hahn ... 588.25

Cash ... 588.25 To record NSF cheque.

30 Computer Equipment... 30.00

Cash ... 30.00 To correct error.

(27)

Problem 9-7A (concluded) Part 3

There are several possible reasons why the cancelled cheques returned with a bank statement may not be numbered sequentially. Common reasons for this include the following:

- Some of the cheques in the numbered sequence may have cleared the bank in a previous period and been returned with the bank statement in that previous period. - Some of the cheques in the numbered sequence may remain outstanding. If so, they

will be returned with the bank statement in a later period when they clear the bank. - The issuer of the cheques may have voided one or more of the cheques in the

numbered sequence, perhaps because of making an error in writing the cheques. - Occasionally, a cheque will reach the bank but the bank will incorrectly charge the

cheque to the wrong account. When the bank detects the error, it will return the cheque separately with a note of explanation.

CELTIC MINERALS Bank Reconciliation

April 30, 2005

Bank statement balance... $26,330 Book balance... $22,460 Add:

Deposit of April 30 in transit ... 13,000 Add: Owner Investment... 30,000 Error (Chq #28: 8,200 – 2,800)... 5,400 $52,460 $44,730

Deduct: Deduct: Outstanding cheques: NSF — Don James ... $4,000

#14... $1,600 Service charge... 120 #22... 3,200 Interest expense... 500 #25... 1,000 Payment ... 10,000 14,620 #27... 650 #30... 100 #32... 340 6,890

(28)

b)

Apr. 30 Accounts Receivable – Don James ... 4,000

Cash ... 4,000 To reinstate customer account.

30 Bank Service Charges Expense... 120

Cash ... 120 To record April bank service charges.

30 Interest Expense... 500

Cash ... 500 To record April interest expense.

30 Note Payable... 10,000

Cash ... 10,000 To record April payment on note.

30 Cash... 30,000

Scott O’Donnell, Capital... 30,000 To record investment by owner.

(29)

ASWAN COMPANY Bank Reconciliation

November 30, 2005

Bank statement balance... $56,274.20 Book balance... $49,178.22* Add:

Deposit of Nov 30 in transit... 1,915.40 Add: Interest revenue ... 1,200.00

$58,189.60 $50,378.22 Deduct: Outstanding cheques: #1224... $1,635.29 #1230... 2,468.30 #1232... 3,625.15 #1233... 482.17 8,210.91 Deduct: NSF ... $372.13 Service charge.... 27.40 399.53

Adjusted bank balance... $49,978.69 Adjusted book balance... $49,978.69

* Oct 31 adjusted balance of $ 41,847.85 Add: November receipts 173,523.91 Less: November disbursements 166,193.54 November 30 unadjusted balance $ 49,178.22 b)

Nov. 30 Bank Service Charges Expense... 27.40

Cash ... 27.40 To record November bank charges.

30 Accounts Receivable – Trevor Clerk... 372.13

Cash ... 372.13 To reinstate customer account.

30 Cash... 1,200.00

Interest Revenue... 1,200.00 To record interest earned in November.

(30)

Part 1

DUNDEE REALTY Bank Reconciliation

October 31, 2005

Bank statement balance... $48,260 Book balance... $38,535 Add: Deposit of October 31 in transit... 2,300 Error... 1,700 $52,260 Add: Error (A/P: 980 – 890)... 90 Note Receivable ... 5,000 Less: Collection Fee... 45

Interest Revenue ... 350 5,395 43,930 Deduct: Outstanding cheques: #2033... $3,200 #2099... 850 #2300... 1,800 #2345... 5,400 11,250 Deduct: Service charge... $ 220 Error (18,500 – 15,800)... 2,700 2,920

(31)

Problem 9-10A (concluded)

Part 2

Oct. 31 Bank Service Charges Expense ... 220

Cash... 220 To record October bank charges.

31 Accounts Receivable – Teresa Krant... 2,700

Cash... 2,700 To correct error.

31 Cash ... 90

Accounts Payable – Decker Company ... 90 To correct error.

31 Cash ... 5,305 Collection Expense... 45

Note Receivable... 5,000 Interest Revenue... 350 To record collection of note plus interest

earned less collection expense. Part 3

If the entries in Part 2 are not recorded, net income and owner’s equity would be under-stated by $85 ($350 – $220 – $45 = $85), assets would be underunder-stated by $175 (–$220 – $2,700 + $2,700 + $90 + $5,305 – $5,000 = $175), and liabilities would be understated by $90.

(32)

Problem 9-1B (20 minutes)

1. Violates segregation of duties. It is a good internal control to segregate duties for cash receipts and cash disbursements. An employee independent of these two functions should be given the responsibility for reconciling the bank account monthly. If no employees are available, this is an acceptable duty for the owner as it allows for owner supervision which is a good internal control.

2. Violates applying technological controls and segregation of duties. It is safe to assume that Stan Spencer has knowledge of employee passwords since he implemented the system of password protection company wide. It is a potentially dangerous situation that Stan processes payroll and can now probably change employee pay rates at will, or add a fictitious employee to the file. The company should hire an outside consultant to rework the password protection system so Stan will not have the knowledge that he currently possesses.

3. Violates applying technological controls. The theatre’s system needs to be backed up at least daily, not weekly. The theatre needs to change the back-up policy and make sure the back-up copies are stored off the premises.

4. Violates segregation of duties. The company needs to have three employees handle these functions instead of two. One employee should place purchase orders, one should receive merchandise, and the third should pay vendors.

5. Violates applying technological controls. The use of the cheque protector is a good internal control. However the company needs to keep the cheques and cheque protector in a locked environment to prevent unauthorized use.

(33)

Problem 9-2B (30 minutes) Part 1

July 5 Petty Cash... 200.00

Part 2

DODGE & SONS

Petty Cash Payments Report July 5 – 31, 2005

Receipts: Delivery expense

July 11 Delivery of customer’s merchandise.... $ 8.75

Auto expense

July 30 Reimbursement for auto expense... 58.80

Postage expense

July 28 Purchased stamps... 16.00 Transportation-in (Merchandise Inventory)

July 6 COD charges on purchased

merchandise... $14.50 27 COD charges on purchased

merchandise... 47.10 61.60

Office supplies

July 12 Purchased file folders ... $12.13 14 Reimbursement for office supplies... 9.65

18 Purchased paper... 22.54 44.32

Equals: Cash required to replenish petty cash... 188.47 Cash over/(short) ... $ 1.00 Part 3

July 31 Delivery Expense... 8.75

Auto Expense ... 58.80 Postage Expense... 16.00 Merchandise Inventory ... 61.60 Office Supplies ... 44.32 Petty Cash... 50.00

Cash Over and Short ... 1.00 Cash ... 238.47

To reimburse fund and increase it by $50. Part 4

If the entry in Part 3 was not recorded, net income, assets, and owner’s equity would be overstated by $82.55 ($8.75 + $58.80 + $16.00 – $1.00 = $82.55).

(34)

Feb. 3 Petty Cash... 150.00

Cash ... 150.00 To establish fund.

14 Postage Expenses... 14.82 Repairs Expense, Computer ... 36.57

Merchandise Inventory ... 17.60 Office Supplies ... 16.29

Petty Cash... 25.00

28 Advertising Expense... 40.00 Delivery Expense... 58.00 Office Supplies ... 28.19 Petty Cash... 75.00

Part 2

If the February 28 reimbursement is not made and no entry is recorded, the expenses would not be recognized and net income and owner's equity would be overstated by $126.19 ($40.00 + $58.00 + $28.19). Similarly, the petty cash asset and total assets would be overstated by $126.19.

Even though the February 28 entry shows a debit to Office Supplies instead of Office Supplies Expense, the expense would turn out to be understated without this entry. This result occurs because the expense equals the difference between the unadjusted Office Supplies account balance and the count of office supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supplies expense will be understated.

(35)

Problem 9-4B (30 minutes) a.

BURNABY COMPANY Bank Reconciliation

November 30, 2005

Bank statement balance... $ 6,703.54 Book balance... $4,833.26

Add: Deposit of Nov. 29 ... 1,776.58 $ 8,480.12 Deduct: Outstanding cheques: No. 548 ... $949.04 Deduct:

No. 550 ... 917.12 Bank service charges.. 36.50 No. 552 ... 885.36

No. 553 ... 931.84

3,683.36 Adjusted bank balance... $ 4,796.76 Adjusted book balance... $4,796.76 b.

Nov. 30 Bank Service Charges Expense... 36.50

Cash ... 36.50 To record November bank charges.

c. If the entry in (b) was not recorded, net income, assets, and owner’s equity would each be overstated.

(36)

a)

ARBOUR GLEN APARTMENTS Bank Reconciliation

June 30, 2005

Bank statement balance... $35,070 Book balance... $31,800 Add:

Deposit of June 30 in transit... 7,100 Add: Error (A/R)... 6,300

$42,170 $38,100

Deduct:

Outstanding cheques: Deduct: Service charge ... 200 #120 ... #127 ... #131 ... #132 ... #135 ... $ 520 1,700 225 1,175 650 4,270 Adjusted bank balance... $37,900 Adjusted book balance... $37,900

b)

Jun. 30 Bank Service Charges Expense ... 200

Cash ... 200 To record June bank charges.

Cash ... 6,300 Accounts Receivable – Darla Smith... 6,300 To correct error.

(37)

BOHANNON CO. Bank Reconciliation

December 31, 2005

Bank statement balance... $45,091.80 Book balance of cash ... $31,743.70

Add: Add:

Deposit of December 31 ... 7,666.10 Error recording Cheque

No. 1267... 18.00 Proceeds of note less

collection charge ... 19,980.00

$52,757.90 $51,741,70

Deduct: Deduct:

Cheques No. 1242... $ 370.50 NSF — Tork

1273... 1,084.20 Ind. ... $749.50

1282... 390.00 1,844.70 Printing charge ... 79.00 828.50 Adjusted bank balance... $50,913.20 Adjusted book balance... $50,913.20 Part 2 Dec. 31 Cash... 18.00 Office Supplies... 18.00 To correct error. 31 Cash... 19,980.00 Collection Expense ... 20.00 Notes Receivable ... 20,000.00 To record collection of note less collection fee.

31 Accounts Receivable—Tork Industries... 749.50

31 Office Supplies Expense ... 79.00

Cash ... 79.00 To record cheque printing charge.

Part 3

In a banking context, a debit memo is a notification from the bank that they have debited the depositor's account. Since the depositor’s account is a liability of the bank (a credit balance account), the debit notification means they have reduced the depositor’s account balance. Conversely, a credit memo is a notification that the depositor’s account has been credited, which means increased in this context.

(38)

SAFETY SYSTEMS Bank Reconciliation

May 31, 2005

Bank statement balance... $21,808.60 Book balance of cash... $15,270.20

Add: Add:

Deposit of May 31... 2,526.30 Proceeds of note... $7,300.00

$24,334.90 Less: Collection charge .... 100.00 7,200.00 $22,470.20

Deduct: Deduct:

Cheques No. 1780 .... $1,325.90 NSF — Gertie Mayer... $431.80

1786 .... 353.10 Service charge ... 12.00

1789 .... 639.50

$ 2,318.50 Error recording Cheque No. 1788... 10.00 453.80 Adjusted bank balance... $22,016.40 Adjusted book balance... $22,016.40 Part 2

May 31 Cash... 7,200.00

Collection Expense ... 100.00

Notes Receivable ... 7,300.00 To record collection of note less collection fee.

31 Accounts Receivable—Gertie Mayer... 431.80

31 Bank Service Charges Expense... 12.00

Cash ... 12.00 To record bank charges.

31 Utilities Expense... 10.00

Cash ... 10.00 To correct error.

Part 3

There are several possible reasons why the cancelled cheques returned with a bank statement may not be numbered sequentially. Common reasons for this include the following:

- Some of the cheques in the numbered sequence may have cleared the bank in a previous period and been returned with the bank statement in that previous period.

- Some of the cheques in the numbered sequence may remain outstanding. If so, they will be returned with the bank statement in a later period when they clear the bank.

(39)

Problem 9-7B (concluded)

- Occasionally, a cheque will reach the bank but the bank will incorrectly charge the cheque to the wrong account. When the bank detects the error, it will return the cheque separately with a note of explanation.

MOUNTAINVIEW CO. Bank Reconcilliation November 30, 2005

Bank statement balance... $28,252 Book balance ... $27,013

Add: Add:

Deposit of November 30 ... 2,435 Interest earned ... $ 17 $30,687 Proceeds of note... 2,150

Less: Collection fee... 30 2,137

$29,150

Deduct: Deduct:

Outstanding cheques: NSF—Jerry Skyles... $905 No. 1393 ... $ 745 Error on cheque

No. 1406 ... 1,322 no. 1404 ... 50 955 No. 1408 ... 425 2,492

Adjusted bank balance... $28,195 Adjusted book balance ... $28,195 Part 2

Nov. 30 Cash ... 2,120 Collection Expense... 30

Notes Receivable... 2,150 To record collection of note less fee.

30 Cash ... 17

Interest Revenue... 17 To record interest revenue.

30 Account Receivable—Jerry Skyles... 905

Cash... 905 To record NSF cheque.

30 Computer Equipment ... 50

Cash... 50 To correct error.

(40)

EMIRATES COMPANY Bank Reconciliation

February 28, 2005

Bank statement balance... $ 9,600 Book balance... $12,992 Add: Deposit of February 28 in transit... 6,300 $15,900 Add: Note Rec'ble... $900 Less: Fee... 20 Error (Office Sup) ... 198

Interest Revenue ... 50 1,128 Deduct: $14,120 Outstanding cheques: #200... $ 330 #202... 1,600 #205... 110 #213... 35 #240... 200 2,275 Deduct: NSF—Tahani Ahmad... $435 Cheque printing... 60 495

Adjusted bank balance... $13,625 Adjusted book balance... $13,625

Feb. 28 Accounts Receivable – Tahani Ahmad... 435

Cash... 435 To reinstate customer account re NSF cheque.

28 Cash... 198

Office Supplies ... 198 To correct error.

28 Office Supplies Expense... 60

Cash... 60 To record cheque printing expense.

28 Cash... 50

Interest Revenue ... 50 To record interest earned.

28 Cash... 880 Collection Expense ... 20

Note Receivable... 900 To record collection of note less collection

(41)

Problem 9-10B Part 1

HR CAFE Bank Reconciliation

December 31, 2005

Bank statement balance... $25,430 Book balance ... $11,040 Add:

Deposit of Dec. 31 in transit...

Error... 10,0001,570 $37,000 Add: Error (480 – 345)... $ 135 Note Rec’ble ... 15,000 Less: Fee... 10 Interest revenue ... 75 15,200 $26,240 Deduct: Outstanding cheques: #197... $4,000 #199... 9,000 13,000 Deduct: NSF–Neon Company... $ 2,100 Service charge ... 50 Error (930 – 840)... 90 2,240 Adjusted bank balance... $24,000 Adjusted book balance ... $24,000 Part 2

Dec. 31 Accounts Receivable – Della Armstrong ... 90

Cash... 90 To correct error.

Accounts Receivable – Neon Company... 2,100

Cash... 2,100 To reinstate customer account re NSF cheque.

Cash... 135 Accounts Payable – CT Financial... 135

To correct error.

Bank Service Charges Expense... 50

Cash... 50 To record December bank charges.

Collection Expense ... 10 Cash... 15,065

Note Receivable... 15,000 Interest Revenue ... 75 To record collection of note and interest

(42)

If the entries in Part 2 were not recorded, net income and owner’s equity would be understated by $15 ($75 – $50 – $10 = $15); assets would be understated by $150 ($90 – $90 + $2,100 – $2,100 + $135 – $50 + $15,065 – $15,000 = $150); and liabilities would be understated by $135.

(43)

ANALYTICAL AND REVIEW PROBLEMS A&R Problem 9-1

1.

CANDY’S CLEANING SERVICES Bank Reconciliation

April 30, 2005

Bank balance... $33,452 Book balance... $21,051 Add: Error Cheque #879 ... 2,600 Deduct: $36,052 Interest expense... 47 Deduct: NSF ... 412

Error Cheque #93 ... $ 100 Service charge... 40 499 Outstanding cheques:

# 86... 14,000

#100... 1,400 15,500

Adjusted bank balance... $20,552 Adjusted book balance... $20,552

2.

April 30 Interest Expense... 47

Cash ... 47 To record interest expense.

30 Accounts Receivable - Bonne... 412

Cash ... 412 To record NSF cheque.

(44)

(a)

BRANDON COMPANY Bank Reconciliation

May 31, 2005

Balance per books... $ 9,500 Add: collection of note... $1,000

Interest thereon ... 60 1,060

$10,560

Deduct: Bank charges ... $ 10

Error re cheque #78... 36

NSF cheque – Rhonda Teal ... 500 546

Adjusted book balance ... $10,014 Balance per bank ... $ 9,359 Add: Deposit in transit... 2,455 $11,814 Deduct: Outstanding cheques... 1,800 Adjusted bank balance... $10,014 (b) May 31 Cash... 1,060 Notes Receivable ... 1,000 Interest Revenue ... 60

To record collection of note plus interest revenue. 31 Accounts Payable—Delta Co. ... 36

Bank Service Charges Expense... 10

Accounts Receivable—Rhonda Teal ... 500

Cash ... 546 To record error, bank service charges, and NSF cheque.

(45)

A&R Problem 9-3

1. The weakness in the operation of the petty cash fund is that no one person is in charge of the funds and “disbursements” are made without approval of a responsible person and without supporting documentation (vouchers, invoices, etc.)

Improvement in the operation of the fund can be accomplished by placing one individual in charge of the fund and requiring that disbursements from the fund can only be made on the basis of an authorized voucher, authorization to be by a person(s) other than the custodian of the fund.

2. The principle of objectivity is violated in that disbursements are made without the necessary documentation, that is, an authorized voucher supported by an invoice, cash register tape, etc.

(46)

EC 9-1

1. In a small business office it is very important that the owner of the business become involved with overseeing procedures. In this medical office it would enhance the internal control environment if Dr. Thomen would reconcile the bank statement.

2. Unfortunately, due to collusion of the employees the bank reconciliation will not detect the fraud. The cash deposits per the books will reconcile to the cash deposits per the bank.

3. Despite the collusion the scheme is not foolproof. The bank employee may become suspicious and call Dr. Thomen and ask if she is aware that occasionally her employees cash patient cheques for cash. An astute patient might notice that the statement received contains a miscellaneous credit rather than a cash payment notation. If the patient is aware of accounting practices Dr. Thomen might be advised. Dr. Thomen might be able to uncover the fraud herself if she reviews the daily posting log generated by most computers and notices in the batch totals that miscellaneous credits are posted at times instead of all cash payment credits.

4. Dr. Thomen should review her salary schedules for employees to make sure that she is at least offering market pay. She may want to consider bonding the employees to insure herself against material losses. Dr. Thomen should probably reconcile the bank statement herself as well as make it a practice to review the daily posting log for miscellaneous credits. Also she should implement a policy whereby she is the only one to authorize any miscellaneous credits to patient accounts.

(47)

Focus on Financial Statements FFS 9-1 Worton Consulting Balance Sheet December 31, 2005 Assets Current assets: Cash1_... _{$ 14,500} Accounts receivable2_..._28,500 Prepaid rent3_... _3,250

Total current assets... $ 46,250 Property, plant and equipment:

Store fixtures ... $117,000

Less: Accumulated amortization4_... _{90,200 26,800} Total assets... $ 73,050 Liabilities

Current liabilities:

Accounts payable ... $18,000 Salaries payable ... 4,000 Current portion of long-term note ... 7,000

Total current liabilities ... $ 29,000 Long-term liabilities:

Note payable, less $7,000 current portion... 15,000

Total liabilities... $ 44,000 Owner’s Equity

Ellis Worton, capital ... 29,050 Total liabilities and owner’s equity... $ 73,050