Accounting Tools for Business Decision Making 4th edition

Paul D. KimmelJerry J. Weygandt and Donald E. Kieso

Solutions Manual Test Bank

Accounting : Tools for Business Decision Making (ISBN10: 0470534788; ISBN13: 9780470534786)   

Solutions Manual + Test Bank -- $35  Buy Now


Click here download the sample chapter.

* Contact us if you need help.
_____________________________________________________________________

Chapter 7

Questions

1. A local bank reported that it lost $150,000 as the result of employee fraud. Doug Steeber is not clear on what is meant by “employee fraud.” Explain the meaning of fraud to Doug and give an example of fraud that might occur at a bank.

2. Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three factors and explain what is meant by each.

3. Identify the five components of a good internal control system.

4. “Internal control is concerned only with enhancing the accuracy of the accounting records.” Do you agree? Explain.

5. Discuss how the Sarbanes-Oxley Act has increased the importance of internal control to top managers of a company.

6. What principles of internal control apply to most businesses?

7. In the corner grocery store, all sales clerks make change out of one cash register drawer. Is this a violation of internal control? Why?

8. Graham Moran is reviewing the principle of segregation of duties. What are the two common applications of this principle?

9. How do documentation procedures contribute to good internal control?

10. What internal control objectives are met by physical controls?

11. (a) Explain the control principle of independent internal verification.

(b) What practices are important in applying this principle?

12. As the company accountant, explain the following ideas to the management of Kovacic Company. (a) The concept of reasonable assurance in internal control.

(b) The importance of the human factor in internal control.

13. Discuss the human resources department’s involvement in internal controls.

14. Coggins Inc. owns the following assets at the balance sheet date. Cash in bank—savings account $ 8,000 Cash on hand 1,100 Cash refund due from the IRS 1,000 Checking account balance 12,000 Postdated checks 500 What amount should be reported as Cash in the balance sheet?

15. What principle(s) of internal control is (are) involved in making daily cash counts of over-the-counter receipts?

16. Assume that Kohl’s Department Stores installed new cash registers in its stores. How do cash registers improve internal control over cash receipts?

17. At Yorio Wholesale Company, two mail clerks open all mail receipts. How does this strengthen internal control?

18. “To have maximum effective internal control over cash disbursements, all payments should be made by check.” Is this true? Explain.

19. Remsen Company’s internal controls over cash disbursements provide for the treasurer to sign checks imprinted by a checkwriter after comparing the check with the approved invoice. Identify the internal control principles that are present in these controls.

20. How do these principles apply to cash disbursements? (a) Physical controls.

(b) Human resource controls.

21. What is the essential feature of an electronic funds transfer (EFT) procedure?

22. “The use of a bank contributes significantly to good internal control over cash.” Is this true? Why?

23. Peter Dunn is confused about the lack of agreement between the cash balance per books and the balance per bank. Explain the causes for the lack of agreement to Peter and give an example of each cause.

24. Identify the basic principles of cash management.

25. Jennifer Earl asks your help concerning an NSF check. Explain to Jennifer (a) what an NSF check is,



(b) how it is treated in a bank reconciliation, and

(c) whether it will require an adjusting entry on the company’s books.

26. (a) Describe cash equivalents and explain how they are reported.

(b) How should restricted cash funds be reported on the balance sheet?

27. What was Tootsie Roll’s balance in cash and cash equivalents at December 31, 2009? Did it report any restricted cash? How did Tootsie Roll define cash equivalents?

*28. (a) Identify the three activities that pertain to a petty cash fund, and indicate an internal control principle that is applicable to each activity.

(b) When are journal entries required in the operation of a petty cash fund?



Brief Exercises

BE7-1 Match each situation with the fraud triangle factor (opportunity, financial pressure, or rationalization) that best describes it. (a) An employee’s monthly credit card payments are nearly 75% of their monthly earnings.

(b) An employee earns minimum wage at a firm that has reported record earnings for each of the last five years.

(c) An employee has an expensive gambling habit.

(d) An employee has check writing and signing responsibilities for a small company, and is also responsible for reconciling the bank account.

BE7-2 Gwyn Wallander is the new owner of Bennett Co. She has heard about internal control but is not clear about its importance for her business. Explain to Gwyn the four purposes of internal control, and give her one application of each purpose for Bennett Co.

BE7-3 The internal control procedures in Phillips Company make the following provisions. Identify the principles of internal control that are being followed in each case. (a) Employees who have physical custody of assets do not have access to the accounting records.

(b) Each month the assets on hand are compared to the accounting records by an internal auditor.

(c) A prenumbered shipping document is prepared for each shipment of goods to customers.

BE7-4 Aldstadt Company has the following internal control procedures over cash receipts. Identify the internal control principle that is applicable to each procedure. (a) All over-the-counter receipts are registered on cash registers.

(b) All cashiers are bonded.

(c) Daily cash counts are made by cashier department supervisors.

(d) The duties of receiving cash, recording cash, and having custody of cash are assigned to different individuals.

(e) Only cashiers may operate cash registers.

BE7-5 While examining cash receipts information, the accounting department determined the following information: opening cash balance $150, cash on hand $1,125.74, and cash sales per register tape $988.62. Prepare the required journal entry based upon the cash count sheet.

BE7-6 Ndon Company has the following internal control procedures over cash disbursements. Identify the internal control principle that is applicable to each procedure. (a) Company checks are prenumbered.

(b) The bank statement is reconciled monthly by an internal auditor.

(c) Blank checks are stored in a safe in the treasurer’s office.

(d) Only the treasurer or assistant treasurer may sign checks.

(e) Check signers are not allowed to record cash disbursement transactions.

BE7-7 Jay Bauer is uncertain about the control features of a bank account. Explain the control benefits of (a) a checking account and

(b) a bank statement.

BE7-8 The following reconciling items are applicable to the bank reconciliation for Gratz Co. Indicate how each item should be shown on a bank reconciliation. (a) Outstanding checks.

(b) Bank debit memorandum for service charge.

(c) Bank credit memorandum for collecting a note for the depositor.

(d) Deposit in transit.

BE7-9 Using the data in

BE7-8, indicate (a) the items that will result in an adjustment to the depositor’s records and

(b) why the other items do not require adjustment.

BE7-10 At July 31, Cisler Company has this bank information: cash balance per bank $7,291; outstanding checks $762; deposits in transit $1,350; and a bank service charge $40. Determine the adjusted cash balance per bank at July 31.

BE7-11 In the month of November, Hasbrook Company Inc. wrote checks in the amount of $9,750. In December, checks in the amount of $11,762 were written. In November, $8,800 of these checks were presented to the bank for payment, and $10,889 in December. What is the amount of outstanding checks at the end of November? At the end of December?

BE7-12 Laib Company has these cash balances: cash in bank $12,742; payroll bank account $6,000; and plant expansion fund cash $25,000. Explain how each balance should be reported on the balance sheet.

BE7-13 The following information is available for Eckman Company for the month of January: expected cash receipts $59,000; expected cash disbursements $67,000; and cash balance on January 1, $12,000. Management wishes to maintain a minimum cash balance of $9,000. Prepare a basic cash budget for the month of January. *

BE7-14 On March 20, Palasz’s petty cash fund of $100 is replenished when the fund contains $19 in cash and receipts for postage $40, supplies $26, and travel expense $15. Prepare the journal entry to record the replenishment of the petty cash fund.

7-1 Identify which control activity is violated in each of the following situations, and explain how the situation creates an opportunity for fraud or inappropriate accounting practices.

1. Once a month, the sales department sends sales invoices to the accounting department to be recorded.

2. Greg Mursky orders merchandise for Ross Company; he also receives merchandise and authorizes payment for merchandise.

3. Several clerks at Terando’s Groceries use the same cash register drawer.

7-2 Mark Graziano is concerned with control over mail receipts at Grazi’s Sporting Goods. All mail receipts are opened by Glen Schrag. Glen sends the checks to the accounting department, where they are stamped “For Deposit Only.” The accounting department records and deposits the mail receipts weekly. Mark asks your help in installing a good system of internal control over mail receipts.

7-3 Leon Holzner owns Leon Blankets. Leon asks you to explain how he should treat the following reconciling items when reconciling the company’s bank account.

1. Outstanding checks

2. A deposit in transit

3. The bank charged to our account a check written by another company

4. A debit memorandum for a bank service charge Do it! Do it! Do it!



Review

Exercises

E7-1 Bank employees use a system known as the “maker-checker” system. An employee will record an entry in the appropriate journal, and then a supervisor will verify and approve the entry. These days, as all of a bank’s accounts are computerized, the employee first enters a batch of entries into the computer, and then the entries are posted automatically to the general ledger account after the supervisor approves them on the system. Access to the computer system is password-protected and task-specific, which means that the computer system will not allow the employee to approve a transaction or the supervisor to record a transaction.

Instructions

 Identify the principles of internal control inherent in the “maker-checker” procedure used by banks.

E7-2 Lisa’s Pizza operates strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizzas are baked.

Instructions

 Identify the six principles of internal control and give an example of each principle that you might observe when picking up your pizza. (Note: It may not be possible to observe all the principles.)

E7-3 The following control procedures are used in Danner Company for over-thecounter cash receipts.

1. Cashiers are experienced; thus, they are not bonded.

2. All over-the-counter receipts are registered by three clerks who share a cash register with a single cash drawer.

3. To minimize the risk of robbery, cash in excess of $100 is stored in an unlocked attaché case in the stock room until it is deposited in the bank.

4. At the end of each day the total receipts are counted by the cashier on duty and reconciled to the cash register total.

5. The company accountant makes the bank deposit and then records the day’s receipts.

Instructions

 (a) For each procedure, explain the weakness in internal control and identify the control principle that is violated.

(b) For each weakness, suggest a change in the procedure that will result in good internal control.

E7-4 The following control procedures are used in Katja’s Boutique Shoppe for cash disbursements.

1. Each week, Katja leaves 100 company checks in an unmarked envelope on a shelf behind the cash register.

2. The store manager personally approves all payments before signing and issuing checks.

3. The company checks are unnumbered.

4. After payment, bills are “filed” in a paid invoice folder.

5. The company accountant prepares the bank reconciliation and reports any discrepancies to the owner.

Instructions

 (a) For each procedure, explain the weakness in internal control and identify the internal control principle that is violated.

(b) For each weakness, suggest a change in the procedure that will result in good internal control.

7-4 Ross Corporation’s management wants to maintain a minimum monthly cash balance of $8,000. At the beginning of September, the cash balance is $12,270; expected cash receipts for September are $97,200; cash disbursements are expected to be $115,000. How much cash, if any, must Ross borrow to maintain the desired minimum monthly balance? Determine your answer by using the basic form of the cash budget.



E7-5 At Reyes Company, checks are not prenumbered because both the purchasing agent and the treasurer are authorized to issue checks. Each signer has access to unissued checks kept in an unlocked file cabinet. The purchasing agent pays all bills pertaining to goods purchased for resale. Prior to payment, the purchasing agent determines that the goods have been received and verifies the mathematical accuracy of the vendor’s invoice. After payment, the invoice is filed by vendor and the purchasing agent records the payment in the cash disbursements journal. The treasurer pays all other bills following approval by authorized employees. After payment, the treasurer stamps all bills “paid,” files them by payment date, and records the checks in the cash disbursements journal. Reyes Company maintains one checking account that is reconciled by the treasurer.

Instructions

 (a) List the weaknesses in internal control over cash disbursements.

(b) Identify improvements for correcting these weaknesses.

E7-6 Tasha Orin is unable to reconcile the bank balance at January 31. Tasha’s reconciliation is shown here. Cash balance per bank $3,677.20 Add: NSF check 450.00 Less: Bank service charge 28.00 Adjusted balance per bank $4,099.20 Cash balance per books $3,975.20 Less: Deposits in transit 590.00 Add: Outstanding checks 770.00 Adjusted balance per books $4,155.20

Instructions

 (a) What is the proper adjusted cash balance per bank?

(b) What is the proper adjusted cash balance per books?

(c) Prepare the adjusting journal entries necessary to determine the adjusted cash balance per books.

E7-7 At April 30, the bank reconciliation of Silvestre Company shows three outstanding checks: No. 254 $650, No. 255 $700, and No. 257 $410. The May bank statement and the May cash payments journal are given here.

Bank Statement

Checks Paid

Date Check No. Amount

5-4 254 $650

5-2 257 410

5-17 258 159

5-12 259 275

5-20 260 925

5-29 263 480

5-30 262 750

Cash Payments Journal

Checks Issued

Date Check No. Amount

5-2 258 $159

5-5 259 275

5-10 260 925

5-15 261 500

5-22 262 750

5-24 263 480

5-29 264 360

Instructions

 Using step 2 in the reconciliation procedure (see page 354), list the outstanding checks at May 31.

E7-8 The following information pertains to Ghose Company.

1. Cash balance per bank, July 31, $7,328.

2. July bank service charge not recorded by the depositor $38.

3. Cash balance per books, July 31, $7,364.

4. Deposits in transit, July 31, $2,700.

5. Note for $2,000 collected for Ghose in July by the bank, plus interest $36 less fee $20.

The collection has not been recorded by Ghose, and no interest has been accrued.

6. Outstanding checks, July 31, $686.

Instructions

 (a) Prepare a bank reconciliation at July 31, 2012.

(b) Journalize the adjusting entries at July 31 on the books of Ghose Company.

E7-9 This information relates to the Cash account in the ledger of Hawkins Company.

Balance September 1—$16,400; Cash deposited—$64,000

Balance September 30—$17,600; Checks written—$62,800

The September bank statement shows a balance of $16,500 at September 30 and the following memoranda.

Credits Debits

Collection of $1,800 note plus interest $30 $1,830 NSF check: H. Juno $560

Interest earned on checking account 45 Safety deposit box rent 60

At September 30, deposits in transit were $4,738 and outstanding checks totaled $2,383.

Instructions

 (a) Prepare the bank reconciliation at September 30, 2012.

(b) Prepare the adjusting entries at September 30, assuming (1) the NSF check was from a customer on account, and (2) no interest had been accrued on the note.

E7-10 The cash records of Arora Company show the following. For July:

1. The June 30 bank reconciliation indicated that deposits in transit total $580. During July, the general ledger account Cash shows deposits of $16,900, but the bank statement indicates that only $15,600 in deposits were received during the month.

2. The June 30 bank reconciliation also reported outstanding checks of $940. During the month of July, Arora Company books show that $17,500 of checks were issued, yet the bank statement showed that $16,400 of checks cleared the bank in July. For September:

3. In September, deposits per bank statement totaled $25,900, deposits per books were $26,400, and deposits in transit at September 30 were $2,200.

4. In September, cash disbursements per books were $23,500, checks clearing the bank were $24,000, and outstanding checks at September 30 were $2,100.

There were no bank debit or credit memoranda, and no errors were made by either the bank or Arora Company.

Instructions

 Answer the following questions. (a) In situation 1, what were the deposits in transit at July 31?

(b) In situation 2, what were the outstanding checks at July 31?

(c) In situation 3, what were the deposits in transit at August 31?

(d) In situation 4, what were the outstanding checks at August 31?

E7-11 Mazor Inc.’s bank statement from Hometown Bank at August 31, 2012, gives the following information.

Balance, August 1 $18,400 Bank debit memorandum:

August deposits 71,000 Safety deposit box fee $ 25

Checks cleared in August 68,678 Service charge 50

Bank credit memorandum: Balance, August 31 20,692

Interest earned 45

A summary of the Cash account in the ledger for August shows the following: balance, August

1, $18,700; receipts $74,000; disbursements $73,570; and balance, August 31, $19,130. Analysis reveals that the only reconciling items on the July 31 bank reconciliation were a deposit in transit for $4,800 and outstanding checks of $4,500. In addition, you determine that there was an error involving a company check drawn in August: A check for $400 to a creditor on account that cleared the bank in August was journalized and posted for $40.

Instructions

 (a) Determine deposits in transit.

(b) Determine outstanding checks. (Hint: You need to correct disbursements for the check error.)

(c) Prepare a bank reconciliation at August 31.

(d) Journalize the adjusting entry(ies) to be made by Mazor Inc. at August 31.

E7-12 A new accountant at Netzloff Inc. is trying to identify which of the amounts shown on page 377 should be reported as the current asset “Cash and cash equivalents” in the year-end balance sheet, as of April 30, 2012.

1. $60 of currency and coin in a locked box used for incidental cash transactions.

2. A $10,000 U.S. Treasury bill, due May 31, 2012.

3. $260 of April-dated checks that Netzloff has received from customers but not yet deposited.

4. An $85 check received from a customer in payment of its April account, but postdated to May 1.

5. $2,500 in the company’s checking account.

6. $4,800 in its savings account.

7. $75 of prepaid postage in its postage meter.

8. A $25 IOU from the company receptionist.

Instructions

 (a) What balance should Netzloff report as its “Cash and cash equivalents” balance at April 30, 2012?

(b) In what account(s) and in what financial statement(s) should the items not included in “Cash and cash equivalents” be reported?

E7-13 Amster, Lasca, and Vang, three law students who have joined together to open a law practice, are struggling to manage their cash flow. They haven’t yet built up sufficient clientele and revenues to support their legal practice’s ongoing costs. Initial costs, such as advertising, renovations to their premises, and the like, all result in outgoing cash flow at a time when little is coming in. Amster, Lasca, and Vang haven’t had time to establish a billing system since most of their clients’ cases haven’t yet reached the courts, and the lawyers didn’t think it would be right to bill them until “results were achieved.”

Unfortunately, Amster, Lasca, and Vang’s suppliers don’t feel the same way. Their suppliers expect them to pay their accounts payable within a few days of receiving their bills. So far, there hasn’t even been enough money to pay the three lawyers, and they are not sure how long they can keep practicing law without getting some money into their pockets.

Instructions

 Can you provide any suggestions for Amster, Lasca, and Vang to improve their cash management practices?

E7-14 Merrick Company expects to have a cash balance of $46,000 on January 1, 2012. These are the relevant monthly budget data for the first two months of 2012.

1. Collections from customers: January $71,000, February $146,000

2. Payments to suppliers: January $40,000, February $75,000

3. Wages: January $30,000, February $40,000. Wages are paid in the month they are incurred.

4. Administrative expenses: January $21,000, February $24,000. These costs include depreciation of $1,000 per month. All other costs are paid as incurred.

5. Selling expenses: January $15,000, February $20,000. These costs are exclusive of depreciation. They are paid as incurred.

6. Sales of short-term investments in January are expected to realize $12,000 in cash. Merrick has a line of credit at a local bank that enables it to borrow up to $25,000.

The company wants to maintain a minimum monthly cash balance of $20,000.

Instructions

 Prepare a cash budget for January and February. *

E7-15 During October, Central Light Company experiences the following transactions in establishing a petty cash fund.

Oct. 1 A petty cash fund is established with a check for $150 issued to the petty cash custodian.

31 A check was written to reimburse the fund and increase the fund to $200. A count of the petty cash fund disclosed the following items:

Currency $59.00

Coins 0.70 Expenditure receipts (vouchers):

Supplies $26.10

Telephone, Internet, and fax 16.40

Postage 39.70

Freight-out 6.80



Instructions

 Journalize the entries in October that pertain to the petty cash fund. *

E7-16 Paik Company maintains a petty cash fund for small expenditures. These transactions occurred during the month of August.

Aug. 1 Established the petty cash fund by writing a check on Westown Bank for $200.

15 Replenished the petty cash fund by writing a check for $175. On this date, the fund consisted of $25 in cash and these petty cash receipts: freight-out $74.40, entertainment expense $36, postage expense $33.70 and miscellaneous expense $27.50. 16 Increased the amount of the petty cash fund to $400 by writing a check for $200.

31 Replenished the petty cash fund by writing a check for $283. On this date, the fund consisted of $117 in cash and these petty cash receipts: postage expense $145, entertainment expense $90.60, and freight-out $46.40.

Instructions

 (a) Journalize the petty cash transactions.

(b) Post to the Petty Cash account.

(c) What internal control features exist in a petty cash fund?



Exercises: Set B and

Challenge Exercises

Visit the book’s companion website, at www.wiley.com/college/kimmel, and choose the Student Companion site to access Exercise Set B and Challenge Exercises.

Problems: Set A

P7-1A Classic Theater is in the Greenbelt Mall. A cashier’s booth is located near the entrance to the theater. Two cashiers are employed. One works from 1:00 to 5:00 P.M., the other from 5:00 to 9:00 P.M. Each cashier is bonded. The cashiers receive cash from customers and operate a machine that ejects serially numbered tickets. The rolls of tickets are inserted and locked into the machine by the theater manager at the beginning of each cashier’s shift.

After purchasing a ticket, the customer takes the ticket to a doorperson stationed at the entrance of the theater lobby some 60 feet from the cashier’s booth. The doorperson tears the ticket in half, admits the customer, and returns the ticket stub to the customer.

The other half of the ticket is dropped into a locked box by the doorperson.

At the end of each cashier’s shift, the theater manager removes the ticket rolls from the machine and makes a cash count. The cash count sheet is initialed by the cashier. At the end of the day, the manager deposits the receipts in total in a bank night deposit vault located in the mall. In addition, the manager sends copies of the deposit slip and the initialed cash count sheets to the theater company treasurer for verification and to the company’s accounting department. Receipts from the first shift are stored in a safe located in the manager’s office.

Instructions

 (a) Identify the internal control principles and their application to the cash receipts transactions of Classic Theater.

(b) If the doorperson and cashier decided to collaborate to misappropriate cash, what actions might they take?

P7-2A Nature Hill Middle School wants to raise money for a new sound system for its auditorium. The primary fund-raising event is a dance at which the famous disc jockey Jay Dee will play classic and not-so-classic dance tunes. Barry Cameron, the music and theater instructor, has been given the responsibility for coordinating the fund-raising efforts.

This is Barry’s first experience with fund-raising. He decides to put the eighth-grade choir in charge of the event; he will be a relatively passive observer.

Barry had 500 unnumbered tickets printed for the dance. He left the tickets in a box on his desk and told the choir students to take as many tickets as they thought they could sell for $5 each. In order to ensure that no extra tickets would be floating around, he told them to dispose of any unsold tickets. When the students received payment for the tickets, they were to bring the cash back to Barry, and he would put it in a locked box in his desk drawer.

Some of the students were responsible for decorating the gymnasium for the dance. Barry gave each of them a key to the money box and told them that if they took money out to purchase materials, they should put a note in the box saying how much they took and what it was used for. After two weeks, the money box appeared to be getting full, so Barry asked Robin Herbert to count the money, prepare a deposit slip, and deposit the money in a bank account Barry had opened.

The day of the dance, Barry wrote a check from the account to pay Jay Dee. The DJ said, however, that he accepted only cash and did not give receipts. So Barry took $200 out of the cash box and gave it to Jay. At the dance, Barry had Amy Kuether working at the entrance to the gymnasium, collecting tickets from students and selling tickets to those who had not pre-purchased them. Barry estimated that 400 students attended the dance.

The following day, Barry closed out the bank account, which had $250 in it, and gave that amount plus the $180 in the cash box to Principal Skinner. Principal Skinner seemed surprised that, after generating roughly $2,000 in sales, the dance netted only $430 in cash. Barry did not know how to respond.

Instructions

 Identify as many internal control weaknesses as you can in this scenario, and suggest how each could be addressed.

P7-3A On July 31, 2012, Fraiser Company had a cash balance per books of $6,140. The statement from Nashota State Bank on that date showed a balance of $7,690.80. A comparison of the bank statement with the Cash account revealed the following facts.

1. The bank service charge for July was $25.

2. The bank collected a note receivable of $1,500 for Fraiser Company on July 15, plus $30 of interest. The bank made a $10 charge for the collection. Fraiser has not accrued any interest on the note.

3. The July 31 receipts of $1,193.30 were not included in the bank deposits for July.

These receipts were deposited by the company in a night deposit vault on July 31.

4. Company check No. 2480 issued to T. Crain, a creditor, for $384 that cleared the bank in July was incorrectly entered in the cash payments journal on July 10 for $348.

5. Checks outstanding on July 31 totaled $1,860.10.

6. On July 31, the bank statement showed an NSF charge of $575 for a check received by the company from K. Fonner, a customer, on account.

Instructions

 (a) Prepare the bank reconciliation as of July 31.

(b) Prepare the necessary adjusting entries at July 31.

P7-4A The bank portion of the bank reconciliation for Horsman Company at October 31, 2012, is shown here and on the next page.

HORSMAN COMPANY

Bank Reconciliation

October 31, 2012

Cash balance per bank $12,367.90

Add: Deposits in transit 1,530.20 13,898.10

The adjusted cash balance per bank agreed with the cash balance per books at October 31. The November bank statement showed the following checks and deposits. Less: Outstanding checks

Check Number Check Amount

2451 $ 1,260.40

2470 684.20

2471 844.50

2472 426.80

2474 1,050.00 4,265.90

Adjusted cash balance per bank $ 9,632.20

Bank Statement

Checks Deposits

Date Number Amount Date Amount

11-1 2470 $ 684.20 11-1 $ 1,530.20

11-2 2471 844.50 11-4 1,211.60

11-5 2474 1,050.00 11-8 990.10

11-4 2475 1,640.70 11-13 2,575.00

11-8 2476 2,830.00 11-18 1,472.70

11-10 2477 600.00 11-21 2,945.00

11-15 2479 1,750.00 11-25 2,567.30

11-18 2480 1,330.00 11-28 1,650.00

11-27 2481 695.40 11-30 1,186.00

11-30 2483 575.50 Total $16,127.90

11-29 2486 940.00

Total $12,940.30

The cash records per books for November showed the following.

Cash Payments Journal

Date Number Amount Date Number Amount

11-1 2475 $1,640.70 11-20 2483 $ 575.50

11-2 2476 2,830.00 11-22 2484 829.50

11-2 2477 600.00 11-23 2485 974.80

11-4 2478 538.20 11-24 2486 940.00

11-8 2479 1,705.00 11-29 2487 398.00

11-10 2480 1,330.00 11-30 2488 800.00

11-15 2481 695.40 Total $14,469.10

11-18 2482 612.00

Cash Receipts

Journal

Date Amount

11-3 $ 1,211.60

11-7 990.10

11-12 2,575.00

11-17 1,472.70

11-20 2,954.00

11-24 2,567.30

11-27 1,650.00

11-29 1,186.00

11-30 1,304.00

Total $15,910.70

The bank statement contained two bank memoranda:

1. A credit of $2,242 for the collection of a $2,100 note for Horsman Company plus interest

of $157 and less a collection fee of $15. Horsman Company has not accrued any interest on the note.

2. A debit for the printing of additional company checks $85. Problems: Set A 381

At November 30, the cash balance per books was $11,073.80 and the cash balance per bank statement was $17,712.50. The bank did not make any errors, but Horsman

Company made two errors.

Instructions

 (a) Using the four steps in the reconciliation procedure described on pages 354–355, prepare a bank reconciliation at November 30, 2012.

(b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash receipts should be made to Accounts Receivable.)

P7-5A Stromberg Company of Zwingle, Kansas, spreads herbicides and applies liquid fertilizer for local farmers. On May 31, 2012, the company’s Cash account per its general ledger showed a balance of $6,738.90.

The bank statement from Zwingle State Bank on that date showed the following balance.

ZWINGLE STATE BANK

Checks and Debits Deposits and Credits Daily Balance XXX XXX 5-31 6,968.00 A comparison of the details on the bank statement with the details in the Cash account revealed the following facts.

1. The statement included a debit memo of $40 for the printing of additional company checks.

2. Cash sales of $883.15 on May 12 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $933.15. The bank credited Stromberg Company for the correct amount.

3. Outstanding checks at May 31 totaled $276.25, and deposits in transit were $1,880.15.

4. On May 18, the company issued check No. 1181 for $685 to M. Dornbos, on account. The check, which cleared the bank in May, was incorrectly journalized and posted by Stromberg Company for $658.

5. A $2,600 note receivable was collected by the bank for Stromberg Company on May 31 plus $110 interest. The bank charged a collection fee of $20. No interest has been accrued on the note.

6. Included with the cancelled checks was a check issued by Strongberg Company to P. Jordan for $360 that was incorrectly charged to Stromberg Company by the bank.

7. On May 31, the bank statement showed an NSF charge of $380 for a check issued by Bev Fountain, a customer, to Stromberg Company on account.

Instructions

 (a) Prepare the bank reconciliation at May 31, 2012.

(b) Prepare the necessary adjusting entries for Stromberg Company at May 31, 2012.

P7-6A You are provided with the following information taken from Washburne Inc.’s

March 31, 2012, balance sheet.

Cash $ 11,000

Accounts receivable 20,000

Inventory 36,000

Property, plant, and equipment, net of depreciation 120,000

Accounts payable 22,400

Common stock 150,000

Retained earnings 11,600

Additional information concerning Washburne Inc. is as follows.

1. Gross profit is 25% of sales.

2. Actual and budgeted sales data:

March (actual) $46,000

April (budgeted) 70,000

3. Sales are both cash and credit. Cash collections expected in April are:

March $18,400 (40% of $46,000)

April 42,000 (60% of $70,000) $60,400

4. Half of a month’s purchases are paid for in the month of purchase and half in the following month. Cash disbursements expected in April are:

Purchases March $22,400

Purchases April 28,100 $50,500

5. Cash operating costs are anticipated to be $11,200 for the month of April.

6. Equipment costing $2,500 will be purchased for cash in April.

7. The company wishes to maintain a minimum cash balance of $9,000. An open line of credit is available at the bank. All borrowing is done at the beginning of the month, and all repayments are made at the end of the month. The interest rate is 12% per year, and interest expense is accrued at the end of the month and paid in the following month.

Instructions

 Prepare a cash budget for the month of April. Determine how much cash Washburne Inc. must borrow, or can repay, in April.

P7-7A Austin Corporation prepares monthly cash budgets. Here are relevant data from operating budgets for 2012.

January February

Sales $360,000 $400,000

Purchases 120,000 130,000

Salaries 84,000 81,000

Administrative expenses 72,000 75,000

Selling expenses 79,000 88,000

All sales and purchases are on account. Budgeted collections and disbursement data are given below. All other expenses are paid in the month incurred except for administrative expenses, which include $1,000 of depreciation per month. Other data.

1. Collections from customers: January $326,000; February $378,000.

2. Payments for purchases: January $110,000; February $135,000.

3. Other receipts: January: collection of December 31, 2011, notes receivable $15,000;

February: proceeds from sale of securities $4,000.

4. Other disbursements: February $10,000 cash dividend.

The company’s cash balance on January 1, 2012, is expected to be $46,000. The company wants to maintain a minimum cash balance of $40,000.

Instructions

 Prepare a cash budget for January and February.

P7-8A Fetter Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper.

As a result, Allan Donay handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations. The balance per the bank statement on October 31, 2012, was $18,380. Outstanding checks were: No. 62 for $140.75, No. 183 for $180, No. 284 for $253.25, No. 862 for $190.71, No. 863 for $226.80, and No. 864 for $165.28. Included with the statement was a credit memorandum of $185 indicating the collection of a note receivable for Fetter Company by the bank on October 25. This memorandum has not been recorded by Fetter. The company’s ledger showed one Cash account with a balance of $21,877.72. The balance included undeposited cash on hand. Because of the lack of internal controls, Allan took for personal use all of the undeposited receipts in excess of $3,795.51. He then prepared the following bank reconciliation in an effort to conceal his theft of cash.

Cash balance per books, October 31 $21,877.72

Add: Outstanding checks

No. 862 $190.71

No. 863 226.80

No. 864 165.28 482.79 22,360.51

Less: Undeposited receipts 3,795.51

Unadjusted balance per bank, October 31 18,565.00

Less: Bank credit memorandum 185.00

Cash balance per bank statement, October 31 $18,380.00

Instructions

 (a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the adjusted balance per books.)

(b) Indicate the three ways that Allan attempted to conceal the theft and the dollar amount involved in each method.

(c) What principles of internal control were violated in this case?

Problems: Set B

P7-1B Erin Company recently changed its system of internal control over cash disbursements. The system includes the following features.

1. Instead of being unnumbered and manually prepared, all checks must now be prenumbered and written by using the new checkwriter purchased by the company.

2. Before a check can be issued, each invoice must have the approval of Karen Noonan, the purchasing agent, and Tom Fah, the receiving department supervisor.

3. Checks must be signed by either Carl Merfeld, the treasurer, or Bonnie Kurt, the assistant treasurer. Before signing a check, the signer is expected to compare the amounts of the check with the amounts on the invoice.

4. After signing a check, the signer stamps the invoice “paid” and inserts within the stamp, the date, check number, and amount of the check. The “paid” invoice is then sent to the accounting department for recording.

5. Blank checks are stored in a safe in the treasurer’s office. The combination to the safe is known by only the treasurer and assistant treasurer.

6. Each month the bank statement is reconciled with the bank balance per books by the assistant chief accountant.

7. All employees who handle or account for cash are bonded.

Instructions

 Identify the internal control principles and their application to cash disbursements of Erin Company.

P7-2B The board of trustees of a local church is concerned about the internal accounting controls pertaining to the offering collections made at weekly services. They ask you to serve on a three-person audit team with the internal auditor of a local university and a CPA who has just joined the church. At a meeting of the audit team and the board of trustees, you learn the following.

1. The church’s board of trustees has delegated responsibility for the financial management and audit of the financial records to the finance committee. This group prepares the annual budget and approves major disbursements but is not involved in collections or recordkeeping. No audit has been made in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years. The church does not carry any fidelity insurance.

2. The collection at the weekly service is taken by a team of ushers who volunteer to serve for 1 month. The ushers take the collection plates to a basement office at the rear of the church. They hand their plates to the head usher and return to the church service. After all plates have been turned in, the head usher counts the cash received. The head usher then places the cash in the church safe along with a notation of the amount counted. The head usher volunteers to serve for 3 months.

3. The next morning, the financial secretary opens the safe and recounts the collection. The secretary withholds $150–$200 in cash, depending on the cash expenditures expected for the week, and deposits the remainder of the collections in the bank. To facilitate the deposit, church members who contribute by check are asked to make their checks payable to “Cash.”

4. Each month, the financial secretary reconciles the bank statement and submits a copy of the reconciliation to the board of trustees. The reconciliations have rarely contained any bank errors and have never shown any errors per books.

Instructions

 (a) Indicate the weaknesses in internal accounting control in the handling of collections.

(b) List the improvements in internal control procedures that you plan to make at the next meeting of the audit team for (1) the ushers, (2) the head usher, (3) the financial secretary, and (4) the finance committee.

(c) What church policies should be changed to improve internal control?

P7-3B On May 31, 2012, Laban Company had a cash balance per books of $5,681.50. The bank statement from Citizens Bank on that date showed a balance of $7,964.60. A comparison of the statement with the Cash account revealed the following facts.

1. The statement included a debit memo of $70 for the printing of additional company checks.

2. Cash sales of $786.15 on May 12 were deposited in the bank. The cash receipts journal entry and the deposit slip were incorrectly made for $796.15. The bank credited Laban Company for the correct amount.

3. Outstanding checks at May 31 totaled $1,106.25, and deposits in transit were $799.15.

4. On May 18, the company issued check No. 1181 for $685 to A. Hawkins, on account.

The check, which cleared the bank in May, was incorrectly journalized and posted by Laban Company for $658.

5. A $2,500 note receivable was collected by the bank for Laban Company on May 31 plus $80 interest. The bank charged a collection fee of $42. No interest has been accrued on the note. 6. Included with the cancelled checks was a check issued by Logan Company to D. Reyes for $290 that was incorrectly charged to Laban Company by the bank. 7. On May 31, the bank statement showed an NSF charge of $165 for a check issued by G. Verdier, a customer, to Laban Company on account.

Instructions

 (a) Prepare the bank reconciliation as of May 31, 2012.

(b) Prepare the necessary adjusting entries at May 31, 2012.

P7-4B The bank portion of the bank reconciliation for Carlin Company at November 30, 2012, is shown here and on the next page.

CARLIN COMPANY

Bank Reconciliation

November 30, 2012

Cash balance per bank $14,367.90

Add: Deposits in transit 2,530.20 16,898.10

 The adjusted cash balance per bank agreed with the cash balance per books at November 30. The December bank statement showed the following checks and deposits. Less: Outstanding checks

Check Number Check Amount

3451 $ 2,260.40

3470 1,100.10

3471 844.50

3472 1,426.80

3474 1,050.00 6,681.80

Adjusted cash balance per bank $10,216.30

Bank Statement

Checks Deposits

Date Number Amount Date Amount

12-1 3451 $ 2,260.40 12-1 $ 2,530.20

12-2 3470 1,100.10 12-4 1,211.60

12-7 3472 1,426.80 12-8 2,365.10

12-4 3475 1,640.70 12-16 2,632.70

12-8 3476 1,300.00 12-21 2,945.00

12-10 3477 2,130.00 12-26 2,567.30

12-15 3479 3,080.00 12-29 2,836.00

12-27 3480 600.00 12-30 1,025.00

12-30 3482 475.50 Total $18,112.90

12-29 3484 764.00

12-31 3485 540.80

Total $15,318.30

The cash records per books for December showed the following.

Cash Receipts

Journal

Date Amount

12-3 $ 1,211.60

12-7 2,365.10

12-15 2,672.70

12-20 2,945.00

12-25 2,567.30

12-28 2,836.00

12-30 1,025.00

12-31 1,190.40

Total $16,813.10

Cash Payments Journal

Date Number Amount Date Number Amount

12-1 3475 $1,640.70 12-20 3482 $ 475.50

12-2 3476 1,300.00 12-22 3483 1,340.00

12-2 3477 2,130.00 12-23 3484 764.00

12-4 3478 538.20 12-24 3485 450.80

12-8 3479 3,080.00 12-30 3486 1,389.50

12-10 3480 600.00 Total $14,516.10

12-17 3481 807.40

The bank statement contained two memoranda.

1. A credit of $2,645 for the collection of a $2,500 note for Carlin Company plus interest of $160 and less a collection fee of $15. Carlin Company has not accrued any interest on the note.

2. A debit of $819.10 for an NSF check written by K. Webster, a customer. At December 31, the check had not been redeposited in the bank.

At December 31, the cash balance per books was $12,513.30, and the cash balance per bank statement was $18,988.40. The bank did not make any errors, but Carlin Company made two errors.

Instructions

 (a) Using the four steps in the reconciliation procedure described on pages 354–355, prepare a bank reconciliation at December 31, 2012.

(b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash receipts should be made to Accounts Receivable.)

P7-5B Grossfeld Company of Omaha, Nebraska, provides liquid fertilizer and herbicides to regional farmers. On July 31, 2012, the company’s Cash account per its general ledger showed a balance of $5,876.70.

The bank statement from Tri-State Bank on that date showed the following balance.

TRI-STATE BANK

Checks and Debits Deposits and Credits Daily Balance

XXX XXX 7-31 7,043.80

A comparison of the details on the bank statement with the details in the Cash account revealed the following facts.

1. The bank service charge for July was $32.

2. The bank collected a note receivable of $900 for Grossfeld Company on July 15, plus $48 of interest. The bank made an $18 charge for the collection. Grossfeld has not accrued any interest on the note.

3. The July 31 receipts of $1,339 were not included in the bank deposits for July. These receipts were deposited by the company in a night deposit vault on July 31.

4. Company check No. 2480 issued to S. Tully, a creditor, for $471 that cleared the bank in July was incorrectly entered in the cash payments journal on July 10 for $417.

5. Checks outstanding on July 31 totaled $2,480.10.

6. On July 31, the bank statement showed an NSF charge of $818 for a check received by the company from L. Weare, a customer, on account.

Instructions

 (a) Prepare the bank reconciliation as of July 31, 2012.

(b) Prepare the necessary adjusting entries at July 31, 2012.

P7-6B Pincus Co. expects to have a cash balance of $26,000 on January 1, 2012. Relevant monthly budget data for the first two months of 2012 are as follows.

Collections from customers: January $70,000; February $147,000

Payments to suppliers: January $45,000; February $69,000 Salaries: January $38,000; February $40,000. Salaries are paid in the month they are incurred.

Selling and administrative expenses: January $27,000; February $32,000. These costs are exclusive of depreciation and are paid as incurred.

Sales of short-term investments in January are expected to realize $7,000 in cash. Pincus has a line of credit at a local bank that enables it to borrow up to $45,000. The company wants to maintain a minimum monthly cash balance of $25,000. Any excess cash above the $25,000 minimum is used to pay off the line of credit.

Instructions

 (a) Prepare a cash budget for January and February.

(b) Explain how a cash budget contributes to effective management.

P7-7B Vaux Inc. prepares monthly cash budgets. Shown on page 387 are relevant data from operating budgets for 2012.

All sales and purchases are on account. Collections and disbursement data are given below. All other items above are paid in the month incurred. Depreciation has been excluded from selling and administrative expenses. Other data.

1. Collections from customers: January $293,000; February $358,000.

2. Payments for purchases: January $98,000; February $118,000.

3. Other receipts: January: collection of December 31, 2011, interest receivable $2,000; February: proceeds from sale of short-term investments $5,000

4. Other disbursements: February payment of $20,000 for land

The company’s cash balance on January 1, 2012, is expected to be $58,000. The company wants to maintain a minimum cash balance of $40,000.

Instructions

 Prepare a cash budget for January and February.

P7-8B Monti Company is a very profitable small business. It has not, however, given much consideration to internal control. For example, in an attempt to keep clerical and office expenses to a minimum, the company has combined the jobs of cashier and bookkeeper. As a result, L. Stark handles all cash receipts, keeps the accounting records, and prepares the monthly bank reconciliations.

The balance per the bank statement on October 31, 2012, was $13,600. Outstanding checks were: No. 62 for $126.75, No. 183 for $190, No. 284 for $253.25, No. 862 for $190.71, No. 863 for $226.80, and No. 864 for $165.28. Included with the statement was a credit memorandum of $440 indicating the collection of a note receivable for Monti Company by the bank on October 25. This memorandum has not been recorded by Monti Company.

The company’s ledger showed one Cash account with a balance of $15,797.21. The balance included undeposited cash on hand. Because of the lack of internal controls, Stark took for personal use all of the undeposited receipts in excess of $2,240. He then prepared the following bank reconciliation in an effort to conceal his theft of cash.

January February

Sales $330,000 $400,000

Purchases 110,000 130,000

Salaries 80,000 95,000

Selling and administrative expenses 132,000 150,000

Cash balance per books, October 31 $15,797.21

Add: Outstanding checks

No. 862 $190.71

No. 863 226.80

No. 864 165.28 482.79

16,280.00

Less: Undeposited receipts 2,240.00

Unadjusted balance per bank, October 31 14,040.00

Less: Bank credit memorandum 440.00

Cash balance per bank statement, October 31 $13,600.00

Instructions

 (a) Prepare a correct bank reconciliation. (Hint: Deduct the amount of the theft from the adjusted balance per books.)

(b) Indicate the three ways that Stark attempted to conceal the theft and the dollar amount pertaining to each method.

(c) What principles of internal control were violated in this case?