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Problems: Set C 1

Problems: Set C

P7-1C The Soccer Club decided to sell coupon books as a fund-raising activity. The booksallow users to enjoy restaurants, entertainment, and services such as oil changes, at sub-stantial discounts. The club bought 100 books for $16 each, and members will sell themfor $20. About 20 members attended the last club meeting, and most took one or twobooks to sell. Since the club had already paid for the books and didn’t have other imme-diate cash needs, members do not have to pay for the books until they sell them.

Extra books are stored on a book shelf in the club’s on-campus office. The office isin a great location with plenty of student traffic. It is shared with the Marketing andInformation Systems clubs. Each club has four sets of keys that are used by its officersand members.

As students sell books, they bring the cash or checks to the club’s office. Studentswith unusual class schedules who arrive when the office is locked can put payments un-der the door. Payments are stored in a desk drawer until the treasurer has time to makea bank deposit. Students can pick up more books to sell as needed.

Instructions(a) Indicate the weaknesses in internal accounting control in the club’s fund-raising plan.(b) Indicate improvements in internal control procedures for the club’s fund-raising plan.

Identify internal controlweaknesses for cash receipts.

(SO 1, 2)

Prepare a bank reconciliationand adjusting entries.

(SO 4)

(a) Cash bal. $6,063

Identify internal controlweaknesses in cash receiptsand cash disbursements.

(SO 1, 2, 3)

P7-2C Tom Hall has worked for Dr. Johnson for several years. Tom demonstrates a loy-alty that is rare among employees. He is always willing to “cover” for other employees andhasn’t taken a vacation in three years.

One of Tom’s primary duties at the dental office is to open the mail, list checks re-ceived, and prepare the bank deposit form.

He also collects cash from patients at the cashier window as patients leave. At times,it is so hectic that Tom doesn’t bother to give patients a receipt for the cash paid on theiraccounts. He assures them he will see to it that they receive the proper credit. He is sowell known by most patients that no one has ever complained.

When traffic is slow in the office, Tom offers to help another employee, Sue, post thepayments to patients’ accounts receivable. Dr. Johnson installed a computerized account-ing program that requires a user ID and password to log in, but Tom and Sue have foundthat it is more efficient to just leave the computer on and the receivables file open all thetime, and minimize the file when it is not in use.

InstructionsIdentify the principles of internal control that may be violated in this situation.

P7-3C On March 31, 2012, Taggert Company had a cash balance per books of $5,174.20.The statement from Western Bank on that date showed a balance of $6,041.40. Acomparison of the bank statement with the cash account revealed the following facts.

1. The bank service charge for March was $28.

2. The bank collected a note receivable of $2,000 for Taggert Company on March 15, plus$115 of interest. The bank made a $20 charge for the collection. Taggert has not ac-crued any interest on the note.

3. The March 31 receipts of $1,481.60 were not included in the bank deposits for March.These receipts were deposited by the company in a night deposit vault on March 31.

4. Company check No. 1245 issued to T. Gilroy, a creditor, for $672 that cleared the bankin March was incorrectly entered in the cash payments journal on March 8 for $627.

5. Checks outstanding on March 31 totaled $1,360.00.

6. On March 31 the bank statement showed an NSF charge of $1,033.20 for a checkreceived by the company from R. Fross, a customer, on account.

Instructions(a) Prepare the bank reconciliation as of March 31.(b) Prepare the necessary adjusting entries at March 31.

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The cash records per books for August showed the following.

2 chapter 7 Internal Control and Cash

The adjusted cash balance per bank agreed with the cash balance per books at July 31.The August bank statement showed the following checks and deposits.

TRIAD IMPORTS, INC.Bank Reconciliation

July 31, 2012

Cash balance per bank $ 9,596Add: Deposits in transit 930

$10,526

Less: Outstanding checks

Check Number Check Amount

3151 $ 2903170 8123171 1,5383172 1,0003174 1,172 4,812

Adjusted cash balance per bank $ 5,714

Prepare a bank reconciliationand adjusting entries fromdetailed data.

(SO 4)

P7-4C The bank portion of the bank reconciliation for Triad Imports, Inc. at July 31,2012, is shown below.

Bank Statement

Checks Deposits

Date Number Amount Date Amount

8-1 3170 $ 812 8-1 $ 9308-2 3171 1,538 8-4 1,3258-5 3174 1,172 8-8 1,1528-4 3175 802 8-13 1,1048-8 3176 132 8-18 1,5878-10 3177 737 8-21 1,1598-15 3179 1,325 8-25 1,0548-18 3180 900 8-28 1,8308-27 3181 596 8-30 1,0678-30 3183 93 Total $11,2088-29 3187 734

Total $8,841

Cash Payments Journal

Date Number Amount Date Number Amount

8-1 3175 $ 802 8-20 3183 $ 938-2 3176 132 8-22 3184 7608-2 3177 737 8-23 3185 1,0388-4 3178 1,598 8-24 3186 4558-8 3179 1,325 8-29 3187 7348-10 3180 900 8-30 3188 2738-15 3181 569 Total $10,9248-18 3182 1,508

Cash Receipts Journal

Date Amount

8-3 $ 1,3258-7 1,1528-12 1,0148-17 1,5878-20 1,1598-24 1,0548-27 1,8308-29 1,0678-30 500

Total $10,668


The bank statement contained two bank memoranda:

1. A credit of $1,670 for the collection of a $1,600 note for Triad Imports plus interest of$80 and less a collection fee of $10. Triad Imports has not accrued any interest on thenote.

2. A debit for the printing of additional company checks $70.

At August 31, the cash balance per books was $5,478, and the cash balance per bankstatement was $13,563. The bank did not make any errors, but Triad Imports, Inc. madetwo errors.

Instructions(a) Using the four steps in the reconciliation procedure described in the textbook, pre-

pare a bank reconciliation at August 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. Thecorrection of any errors relating to recording cash receipts should be made toAccounts Receivable.)


Problems: Set C 3

Prepare a bank reconciliationand adjusting entries.

(SO 4)


CENTRAL BANK

Checks and Debits Deposits and Credits Daily Balance

XXX XXX 10-31 4,070

A comparison of the details on the bank statement with the details in the cash accountrevealed the following facts.

1. The statement included a debit memo of $50 for the printing of additional companychecks.

2. Cash sales of $342 on October 6 were deposited in the bank. The cash receipts jour-nal entry and the deposit slip were incorrectly made for $372. The bank credited BugBusters Company for the correct amount.

3. Outstanding checks at October 31 totaled $1,250, and deposits in transit were $2,390.

4. On October 13, the company issued check No. 4263 for $196 to T. Grey, on account.The check, which cleared the bank in May, was incorrectly journalized and posted byBug Busters Company for $169.

5. A $1,000 note receivable was collected by the bank for Bug Busters Company on October 31 plus $50 interest. The bank charged a collection fee of $15. No interest hasbeen accrued on the note.

6. Included with the cancelled checks was a check issued by Fig Leaf Company for $120that was incorrectly charged to Bug Busters Company by the bank.

7. On October 31, the bank statement showed an NSF charge of $230 for a check issuedby Jon Simpson, a customer, to Bug Busters Company on account.

Instructions(a) Prepare the bank reconciliation at October 31, 2012.(b) Prepare the necessary adjusting entries for Bug Busters Company at October 31, 2012.

P7-5C Bug Busters Company provides insect extermination services. On October 31,2012, the company’s cash account per its general ledger showed a balance of $4,632.

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

Cash $ 19,000Accounts receivable 47,600Inventory 21,000Property, plant, and equipment, net of depreciation 70,400Accounts payable 18,200Common stock 110,000Retained earnings 21,800

P7-6C You are provided with the following information taken from Items Inc.’s May 31,2012, balance sheet.

Prepare a cash budget.

(SO 7)


4 chapter 7 Internal Control and Cash

January February

Sales $260,000 $318,000Purchases 112,000 120,000Salaries 72,000 78,000Administrative expenses 58,000 60,000Selling expenses 30,000 36,000

All sales and purchase are on account. Budgeted collections and disbursement data aregiven below. All other expenses are paid in the month incurred except for administrativeexpenses, which include $2,000 of depreciation per month.

Other data:

1. Collections from customers: January $279,500; February $298,000.

2. Payment for purchases: January $106,000; February $116,000.

3. Other receipts — January: collection of December 31, 2011, interest receivable $7,500;February: proceeds from sale of securities $8,000

4. Other disbursements—January: pay $35,000 note payable due January 1, 2012;February: pay $5,000 cash dividend

5. The company’s cash balance on January 1, 2012 is expected to be $52,000. The com-pany wants to maintain a minimum cash balance of $40,000.

Instructions

Prepare a cash budget for January and February.

Prepare a cash budget.

(SO 7)P7-7C Noble Corporation prepares monthly cash budgets. Here are relevant data fromoperating budgets for 2012.

Additional information concerning Items Inc. is as follows.

1. Gross profit is 40% of sales.

2. Actual and budgeted sales data:

May (actual) $68,000June (budgeted) 60,000

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

May $47,600 (70% of $68,000)June 18,000 (30% of $60,000)

$65,600

4. Half of a month’s purchases are paid for in the month of purchase and half in the fol-lowing month. Cash disbursements expected in June are:

Purchases May $18,200

Purchases June 27,500

$45,700

5. Cash operating costs are anticipated to be $21,300 for the month of June.

6. Equipment costing $6,000 will be purchased for cash in June.

7. The company wishes to maintain a minimum cash balance of $11,000. An open lineof 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 9% per year,and interest expense is accrued at the end of the month and paid in the followingmonth.

InstructionsPrepare a cash budget for the month of June. Determine how much cash Items Inc. mustborrow, or can repay, in June.


Problems: Set C 5

P7-8C Elite Service Company is a very profitable small business. It has not, however,given much consideration to internal control. For example, in an attempt to keep cleri-cal and office expenses to a minimum, the company has combined the jobs of cashierand bookkeeper. As a result, Steve Evans handles all cash receipts, keeps the accountingrecords, and prepares the monthly bank reconciliations.

The balance per the bank statement on March 31, 2012, was $5,931.51. Outstandingchecks were: No. 206 for $358.53, No. 441 for $292, No. 590 for $283.00, No. 781 for$286.00, No. 782 for $319.47, and No. 783 for $303.14. Included with the statementwas a credit memorandum of $175 indicating the collection of a note receivable for EliteService Company by the bank on March 21. This memorandum has not been recordedby Elite Service.

The company’s ledger showed one cash account with a balance of $6,889.53. Thebalance included undeposited cash on hand. Because of the lack of internal controls,Steve took for personal use all of the undeposited receipts in excess of $1,591.63. Hethen prepared the following bank reconciliation in an effort to conceal his theft ofcash.

Cash balance per books, March 31 $6,889.53Add: Outstanding checks

No. 781 $286.00No. 782 319.47No. 783 303.14 808.61

7,698.14Less: Undeposited receipts 1,591.63

Unadjusted balance per bank, March 31 6,106.51Less: Bank credit memorandum 175.00

Cash balance per bank statement, March 31 $5,931.51

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 Steve attempted to conceal the theft and the dollar amount

involved in each method.(c) What principles of internal control were violated in this case?

Prepare a comprehensivebank reconciliation withtheft and internal controldeficiencies.

(SO 1, 2, 3, 4)

(a) Cash bal. $5,681.00


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