Problem set C
PROBLEM 8-1C
For each of these five separate cases, identify the principle of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.
1.Jack McSweeny records all incoming customer cash receipts for his employer and writes off uncollectible accounts at year-end.
2.At Tasty Foods, Bill and Betty work the cash registers and bag groceries. To alleviate the boredom they switch off between bagging and running the cash register every half hour.
3.Marcia Ball does all the posting of accounts payable charges at the Provincial Motel. She prepares the accounts payable vouchers for payment, signs the vouchers, and writes the checks.
4.Melissa Hancock prides herself on hiring quality workers who require little supervision. She sees no reason to insult her best cashier by requiring approval signatures on such small amounts as petty cash disbursements and replenishment.
5.Homer Scrooge has just calculated the total amount his business has paid in insurance premiums over the last ten years. His actual insurance claims have only been 10% of the total paid. He decides to self-insure and save on premiums.
PROBLEM 8-2C
Quinlivan Galleries had the following petty cash transactions in April of the current year:
April 1 Wrote a $500 check, cashed it, and gave the proceeds to Eva Kunkel, the petty cashier.
5Purchased copier paper, $30.30 that was immediately used.
8Paid $49.00 COD shipping charges on merchandise purchased for resale, terms FOB shipping point. Quinlivan uses the perpetual system to account for inventory.
14Paid $6.90 postage to express mail a contract to a customer.
19Reimbursed Ivana Profit, the manager, $70 for a business lunch with a customer.
20Purchased stationery, $56.80 that was immediately used.
21Paid a courier $25 to deliver merchandise sold to a customer, terms FOB destination.
25Paid $15.75 COD shipping charges on merchandise purchased for resale, terms FOB
shipping point.
27Paid $83 for stamps, envelopes, and address lablels classified as postage expense.
30 The fund had $165.25 remaining in the petty cash box. Sorted the petty cash receipts by
accounts affected and exchanged them for a check to reimburse the fund for expenses.
30 The petty cash fund is decreased by $100 to a toal of $400.
Required
1.Prepare the journal entry to establish the petty cash fund.
2.Prepare a petty cash payments report for April with these categories: delivery expense, entertainment expense, postage expense, merchandise inventory (for transportation-in), and office supplies expense. Sort the payments into the appropriate categories and total the expenditures in each category.
3. Prepare the journal entries for part 2 to both (a) reimburse and (b) decrease the amount in the fund.
Problem 8-3C
Bearcat Company set up a petty cash fund for payments of small amounts. The following transactions involving the petty cash fund occurred in April (the last month of the company’s fiscal year)
April 1 Prepared a company check for $250 to establish the petty cash fund.
15 Prepared a company check both to replenish the fund for the following expenditures made
since April 1 .
- Paid $78 for janitorial services
- Paid $63.68 for miscellaneous expenses
- Paid postage expenses of $43.50
- Paid $57.15 for newspaper advertisements.
- Counted $11.15 remaining in the petty cash box.
16 Prepared a company check for $100 to increase the fund to $350
30 The petty cashier reports that $193.39 remains in the fund. A company check is drawn to
replenish the fund for the following expenditures made since April 15.
f. Paid postage expenses of $48.36
- Reimbursed the office manager for business mileage, $63.50
- Paid $39.75 to deliver merchandise to a customer, terms FOB destination.
30 The company decides that the April 16 increase to the fund was too large. It reduces the
fund by $50 leaving a total of $300.
Required
1.Prepare journal entries to establish the fund on April 1, to replenish it on April 15 and on April 30, and to reflect any increase or decrease in the fund balance on April 16 and April 30.
Analysis Component
2. Explain how the company’s financial statements are affected if the petty cash fund is not replenished and no entry is made on April 30.
PROBLEM 8-4C
The following information is available to reconcile Quill Co. book balance of cash with its bank statement cash balance as of July 31, 2008:
a. After all posting is complete on July 31, the company’s Cash account has a $27,610 debit balance, but its bank statement shows a $28,700 balance.
b. Checks outstanding total $8,360.
c.In comparing the canceled checks returned by the bank with the entries in the accounting records, it is found that Check No. 2222 for July phone bill was correctly written and drawn for $720 but was erroneously entered in the accounting records as $270.
d. The bank charged Quill $40 for a safe-deposit box. Quill does not have a safe-deposit box.
e.A debit memorandum for $250 lists a $200 NSF check plus a $50 NSF charge. The check had been received from the Public Trust bank. Quill has not yet recorded this check as NSF.
f.Enclosed with the statement is a $40 debit memorandum for bank services. It has not yet been recorded because no previous notification had been received.
g. The July 31 daily cash receipts of $6,000 were placed in the bank’s night depository on that date but do not appear on the July 31 bank statement.
Required
1.Prepare a bank reconciliation for this company as of July 31, 2008.
2.Prepare the journal entries necessary to bring the company’s book balance of cash into conformity with the reconciled cash balance as of July 31, 2008.
Analysis Component
3. Assume that the July 31, 2008, bank reconciliation for this company is prepared and some items are treated incorrectly. For each of the following errors, explain the effect of the error on (i) the adjusted bank statement cash balance and (ii) the adjusted cash account book balance.
- The company’s unadjusted cash account balance of $27,610 is listed on the reconciliation as $27,160.
- The bank’s debit memorandum for the NSF check is deducted from the bank statement cash balance on the reconciliation.
PROBLEM 8-5C
Sheila and The Screamers most recently reconciled its bank statement and book balances of cash on August 31 and it reported two checks outstanding, No. 6248 for $205 and No. 6250 for $480. The following information is available for its September 30, 2008, reconciliation:
From the September 30 Bank Statement
From Sheila’s Accounting Records
Cash Receipts Deposited
Cash
DateDebit
Sept.5300.00
13450.00
187,200.00
19960.00
301,200.00
______
10,110.00
Cash Disbursements
CheckCash
No. Credit
6252500.00
6253220.00
6254280.00
62551,200.00
625620.00
6257970.00
6258210.00
625940.00
6260150.00
______
3,590.00
CashAcct. No. 101
DateExplanation PR DebitCreditBalance
Aug.31Balance 9,490.00
Sept.30Total receipts R1210,110.0019,600.00
30Total disbursements D233,590.0016,010.00
Other Information
The bank statement shows an end of month balance of $17,750. Check No. 6248 from last month did appear on this month’s bank statement but check No. 6250 along with check No. 6255 and No. 6260 are still outstanding. The September 30 deposit of $1,200 does not appear on the bank statement. The bank statement showed that the band earned $50 of interest income during the month.
Check No. 6258 is correctly drawn for $210 to pay for audio equipment; however, the recordkeeper misread the amount and entered it in the accounting records with a debit to Audio Equipment and a credit to Cash of $120. A $420 check shown received from a customer, M. Gordon, in payment of his account was returned NSF. Its return had not been recorded when the bank first notified the company. The bank statement showed the collection of a $1,600 note for the band by the bank. The bank deducted a $30 collection fee. The collection and fee are not yet recorded.
Required
Preparation Component
1.Prepare the September 30, 2008, bank reconciliation for this company.
2.Prepare the journal entries to adjust the book balance of cash to the reconciled balance.
Analysis Component
3.The bank statement reveals that some of the prenumbered checks in the sequence are missing. Describe three situations that could explain this.