E7-22 Preparing a bank reconciliation
Learning Objective 6
1. Book Deductions $314
Jim Root Corporation operates four bowling alleys. The business just received the October 31,
2018, bank statement from City National Bank, and the statement shows an ending balance of
$910. Listed on the statement are an EFT rent collection of $440, a service charge of $7, NSF
checks totaling $50, and a $23 charge for printed checks. In reviewing the cash records, the
business identified outstanding checks totaling $440 and a deposit in transit of $1,800. During
October, the business recorded a $260 check by debiting Salaries Expense and crediting Cash for
$26. The business’s Cash account shows an October 31 balance of $2,144.
Requirements
1. Prepare the bank reconciliation at October 31.
2. Journalize any transactions required from the bank reconciliation.
SOLUTION
Problems (Group A)
P7-23A Identifying internal control weakness in cash receipts
Learning Objective 2
Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin Broadway,
the mailroom clerk, opens envelopes and separates the checks from the accompanying remittance
advices. Broadway forwards the checks to another employee, who makes the daily bank deposit
but has no access to the accounting records. Broadway sends the remittance advices, which show
cash received, to the accounting department for entry in the accounts. Broadway’s only other
duty is to grant sales allowances to customers. (A sales allowance decreases the customer’s
account receivable.) When Broadway receives a customer check for $600 less a $30 allowance,
he records the sales allowance and forwards the document to the accounting department.
Requirements
1. Identify the internal control weakness in this situation.
2. Who should record sales allowances?
3. What is the amount that should be shown in the ledger for cash receipts?
SOLUTION
P7-24A Correcting internal control weaknesses
Learning Objectives 1, 2, 3
Each of the following situations has an internal control weakness.
a. Upside-Down Applications develops custom programs to customer’s specifications.
Recently, development of a new program stopped while the programmers redesigned
Upside-Down’s accounting system. Upside-Down’s accountants could have performed this
task.
b. Norma Rottler has been your trusted employee for 24 years. She performs all cash-handling
and accounting duties. Norma just purchased a new luxury car and a new home in an
expensive suburb. As owner of the company, you wonder how she can afford these luxuries
because you pay her only $30,000 a year and she has no source of outside income.
c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order to get an
important loan. The loan went through, but Izzie later went bankrupt and could not repay the
bank.
d. The office supply company where Pet Grooming Goods purchases sales receipts recently
notified Pet Grooming Goods that its documents were not prenumbered. Howard Mustro, the
owner, replied that he never uses receipt numbers.
e. Discount stores such as Cusco make most of their sales in cash, with the remainder in credit
card sales. To reduce expenses, one store manager ceases purchasing fidelity bonds on the
cashiers.
f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because the owner
likes to go to the bank on Tuesdays when Joann is working.
Requirements
1. Identify the missing internal control characteristics in each situation.
2. Identify the possible problem caused by each control weakness.
3. Propose a solution to each internal control problem.
SOLUTION
P7-25A Accounting for petty cash transactions
Learning Objective 4
3. June 30, Cash CR $210
On June 1, Fab Salad Dressings creates a petty cash fund with an imprest balance of $300.
During June, Al Franklin, the fund custodian, signs the following petty cash tickets:
Petty Cash Ticket
Number Item Amount
101 Office supplies $ 30
102 Cab fare for executive 20
103 Delivery of package across town 50
104 Business dinner 40
105 Merchandise inventory 90
On June 30, prior to replenishment, the fund contains these tickets plus cash of $90. The
accounts affected by petty cash payments are Office Supplies, Travel Expense, Delivery
Expense, Entertainment Expense, and Merchandise Inventory.
Requirements
1. Explain the characteristics and the internal control features of an imprest fund.
2. On June 30, how much cash should the petty cash fund hold before it is replenished?
3. Journalize all required entries to create the fund and replenish it. Include explanations.
4. Make the July 1 entry to increase the fund balance to $375. Include an explanation and
briefly describe what the custodian does.
SOLUTION
P7-26A Accounting for petty cash transactions
Learning Objective 4
2. June 30, Cash CR $160
Suppose that on June 1, Rockin’ Gyrations, a disc jockey service, creates a petty cash fund with
an imprest balance of $300. During June, Michael Martell, fund custodian, signs the following
petty cash tickets:
Petty Cash Ticket
Number Item Amount
1 Postage for package received $ 30
2 Office party 25
3 Two boxes of stationery 20
4 Printer cartridges 15
5 Business dinner 65
On June 30, prior to replenishment, the fund contains these tickets plus cash of $140. The
accounts affected by petty cash payments are Office Supplies, Entertainment Expense, and
Postage Expense.
Requirements
1. On June 30, how much cash should this petty cash fund hold before it is replenished?
2. Journalize all required entries to (a) create the fund and (b) replenish it. Include explanations.
3. Make the entry on July 1 to increase the fund balance to $325. Include an explanation.
SOLUTION
