EXERCISES
Exercise 6-1 (10 minutes)
Evaluation
The company’s internal control system failed to require separation of asset
custody from asset recordkeeping.
Principles Ignored
(1) The recordkeeper should not have been allowed to sign the company’s
checks.
(2) Since a loss was incurred, the company apparently had not bonded its
employee. If it had, the bonding company would have insured the loss.
If regular, independent reviews of the accounting records had been done,
the payments of salary checks to a nonemployee may have been
discovered earlier.
Exercise 6-2 (15 minutes)
(a) Internal Control Problems
(1) A major internal control problem is that the recordkeeper (who has
control over the accounting records) has physical control over the cash
receipts. Nothing in the system prevents the recordkeeper from taking
cash from the mail and using it personally.
(2) The recordkeeper might also delay recording a 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, and so on. (This type of fraud is called "lapping.")
(3) The recordkeeper also could pocket cash and claim that a payment was
never received and apparently lost in the mail.
(b) Internal Control Recommendations
(1) 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. One might also consider the use of a
P.O. Box for cash receipts by mail as another control procedure.
(2) It is important the recordkeeper not have physical control over cash.
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Exercise 6-3 (15 minutes)
1.
A cash register (with a locked record) should be used at the sales stand—
it should also be anchored to the stand. If a cash register cannot be used,
the total sales value of the sunscreen, shirts, and sunglasses given to the
employee each day should be calculated. 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 sunscreen, shirts, and sunglasses equal to the
amount taken to the stand—possibly consider one or two return trips if
the amounts are large.
2.
The employee should sign a receipt for the total amount of cash he or she
is given each weekend. 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 store, 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.
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Financial Accounting, 4th Edition
Exercise 6-4 (20 minutes)
1.
Jan. 1 Petty Cash ...............................................................
Cash ...................................................................
200
200
To establish a petty cash fund.
2.
Jan. 8 Postage Expense ....................................................
Merchandise Inventory* .........................................
Delivery Expense ....................................................
Miscellaneous Expenses .......................................
Cash ...................................................................
74
29
16
43
162
To reimburse the petty cash fund.
* Transportation-in costs are included in Merchandise
Inventory under a perpetual system.
3.
Jan. 8 Postage Expense ....................................................
Merchandise Inventory ..........................................
Delivery Expense ....................................................
Miscellaneous Expenses .......................................
Cash ...................................................................
74
29
16
43
162
To reimburse the petty cash fund.*
Jan. 8 Petty Cash ...............................................................
Cash ...................................................................
250
250
To increase the petty cash fund.*
* The two January 8 entries can be combined into one entry.
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Exercise 6-5 (20 minutes)
1.
Sept. 9 Petty Cash ...............................................................
Cash ...................................................................
350
350
To establish a $350 petty cash fund.
2.
Sept. 30 Merchandise Inventory* .........................................
Postage Expenses ..................................................
Miscellaneous Expenses .......................................
Cash Short and Over ..............................................
Cash ...................................................................
40
123
80
3
246
To reimburse the petty cash fund.
* Transportation-in costs are included in Merchandise
Inventory under a perpetual system.
3.
Oct. 1
Petty Cash ...............................................................
Cash ...................................................................
50
50
To increase the petty cash fund to $400.
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Financial Accounting, 4th Edition
Exercise 6-6 (20 minutes)
Bank Balance
Add Deduct
Add
1. NSF check from customer returned on Sept.
25 but not recorded by this company.
Book Balance
Not Shown on
Deduct Adjust Reconciliation
x
2. Interest earned on the account.
x
Cr.
Dr.
3. Deposit made on September 5 and
processed by bank on September 6.
4. Check written by another depositor but
charged against this company's account.
x
x
5. Bank service charge.
x
Cr.
6. Checks outstanding on August 31 that
cleared the bank in September.
x
7. Check written against the company account
and cleared by the bank; erroneously not
recorded by the company recordkeeper.
x
8. Principal and interest on a note receivable to
this company is collected by the bank but not
yet recorded by the company.
9. Checks written and mailed to payees on
October 2.
10. Checks written by the company and mailed
to payees on September 30.
11. Deposit made on September 30 after the
bank closed.
12. Special bank charge for collection of note in
No. 8 on company's behalf.
Cr.
x
Dr.
x
Dr.
x
x
x
Cr.
Exercise 6-7 (10 minutes)
1. The voucher system of control establishes procedures for: (a) Verifying,
approving, and recording obligations for eventual cash disbursements,
and (b) Issuing checks for payment of verified, approved, and recorded
obligations.
2. All expenditures should be overseen by a voucher system of control
(not only the purchase of merchandise).
3. The voucher is initially prepared by the accounting department when it
receives the purchase requisition from the department making the
request or when it receives reliable evidence that an obligation has been
incurred.
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353
Exercise 6-8 (25 minutes)
DEL GATO CLINIC
Bank Reconciliation
June 30, 2008
Bank statement balance ........
Add
Deposit of June 30 ................
Deduct
Outstanding checks.............
Adjusted bank balance ..........
$10,555
2,856
13,411
1,829
$11,582
Book balance.................................................................................
$11,589
Add
Error on Ck. No. 919..................................................................
9
11,598
Deduct
Bank service charge.................................................................
16
Adjusted book balance ..............................................................
$11,582
Exercise 6-9 (10 minutes)
June 30 Cash ....................................................................
Utilities Expense ..........................................
9
9
To correct a journal entry error.
30 Miscellaneous Expenses ..................................
Cash ..............................................................
16
16
To record bank service charge.
Exercise 6-10 (15 minutes)
(a) Days' sales uncollected on December 31, 2007:
$61,000
$665,000
x 365 = 33.5 days
Days' sales uncollected on December 31, 2008:
$93,000
$747,000
x 365 = 45.4 days
(b) Evaluation: The change from 33.5 to 45.4 days' sales uncollected
indicates that the receivables have become less liquid. While the
accounts receivable were, on average, collected in about one month at
the end of 2007, this has increased by about 12 days in Year 2008. The
company needs to follow up to identify the reasons for this change.
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Financial Accounting, 4th Edition
Exercise 6-11A (10 minutes)
1.
E
3.
A
5.
D
2.
C
4.
F
6.
B
Exercise 6-12B (25 minutes)
a.
Recording inventory at gross amounts
Oct. 2 Merchandise Inventory ................................................ 3,000
Accounts Payable ..................................................
3,000
To record merchandise purchases.
10 Accounts Payable ........................................................ 500
Merchandise Inventory .........................................
500
To record credit memo for returns.
17 Merchandise Inventory ................................................ 5,400
Accounts Payable ..................................................
5,400
To record merchandise purchases.
26 Accounts Payable ........................................................ 5,400
Merchandise Inventory* ........................................
Cash ........................................................................
108
5,292
To record payment for merchandise less the
discount. *($5,400 x .02)
31 Accounts Payable ........................................................ 2,500
Cash ........................................................................
2,500
To record payment for merchandise less the returns
($3,000 - $500).
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Exercise 6-12B (Concluded)
b.
Recording inventory at net amounts
Oct. 2 Merchandise Inventory ................................................ 2,940
Accounts Payable ..................................................
2,940
To record merchandise purchases less
discount [$3,000 - ($3,000 x .02) = $2,940].
10 Accounts Payable ........................................................ 490
Merchandise Inventory ..........................................
490
To record credit memo for returns
[$500 - ($500 x .02)].
*13 Discounts Lost .............................................................
Accounts Payable ..................................................
50
50
To record the discount lost [($3,000 - $500) x.02].
17 Merchandise Inventory ................................................ 5,292
Accounts Payable ..................................................
5,292
To record merchandise purchases less
discount [$5,400 - ($5,400 x .02) = $5,292].
26 Accounts Payable ........................................................ 5,292
Cash ........................................................................
5,292
To record payment for merchandise.
31 Accounts Payable ........................................................ 2,500
Cash ........................................................................
2,500
To record payment for merchandise less returns
($2,940 - $490 + $50).
* This entry could alternatively be recorded on October 31 when the cash payment is
made (this is likely since the invoice was filed incorrectly).
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Financial Accounting, 4th Edition
©McGraw-Hill Companies, 2008
Solutions Manual, Chapter 6
357