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P7-27A Preparing a bank reconciliation and journal entries
Learning Objective 6
1. Adjusted Balance $18,025
The December cash records of Davidson Insurance follow:
Cash Receipts Cash Payments
Date Cash Debit Check No. Cash Credit
Dec. 4 $ 4,240 1416 $ 810
9 550 1417 180
14 600 1418 630
17 1,900 1419 1,390
31 1,860 1420 1,490
1421 700
1422 600
Davidson’s Cash account shows a balance of $17,450 at December 31. On December 31,
Davidson Insurance received the following bank statement:
Additional data for the bank reconciliation follow:
a. The EFT credit was a receipt of rent. The EFT debit was an insurance payment.
b. The NSF check was received from a customer.
c. The $1,400 bank collection was for a note receivable.
d. The correct amount of check no. 1419, for rent expense, is $1,930. Davidson’s controller
mistakenly recorded the check for $1,390.
Requirements
1. Prepare the bank reconciliation of Davidson Insurance at December 31, 2018.
2. Journalize any required entries from the bank reconciliation.
SOLUTION
Requirement 1
P7-28A Preparing a bank reconciliation and journal entries
Learning Objective 6
1. Book Additions $2,120
The August 31 bank statement of Well Healthcare has just arrived from United Bank. To prepare
the bank reconciliation, you gather the following data:
a. The August 31 bank balance is $4,540.
b. The bank statement includes two charges for NSF checks from customers. One is for $380
(#1), and the other is for $180 (#2).
c. The following Well Healthcare checks are outstanding at August 31:
Check No. Amount
237 $ 80
288 190
291 570
294 600
295 30
296 70
d. Well collects from a few customers by EFT. The August bank statement lists a $1,200 EFT
deposit for a collection on account.
e. The bank statement includes two special deposits that Well hasn’t recorded yet: $800 for
dividend revenue, and $120 for the interest revenue Well earned on its bank balance during
August.
f. The bank statement lists a $50 subtraction for the bank service charge.
g. On August 31, the Well treasurer deposited $260, but this deposit does not appear on the
bank statement.
h. The bank statement includes a $1,050 deduction for a check drawn by Multi-State Freight
Company. Well notified the bank of this bank error.
i. Well’s Cash account shows a balance of $2,800 on August 31.
Requirements
1. Prepare the bank reconciliation for Well Healthcare at August 31, 2018.
2. Journalize any required entries from the bank reconciliation. Include an explanation for each
entry.
SOLUTION
Problems (Group B)
P7-29B Identifying internal control weakness in cash receipts
Learning Objective 2
Pendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry Chipello, the
mailroom clerk, opens envelopes and separates the checks from the accompanying remittance
advices. Chipello forwards the checks to another employee, who makes the daily bank deposit
but has no access to the accounting records. Chipello sends the remittance advices, which show
cash received, to the accounting department for entry in the accounts. Chipello’s only other duty
is to grant sales allowances to customers. (A sales allowance decreases the customer’s account
receivable.) When Chipello receives a customer check for $575 less a $45 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
P7-30B Correcting internal control weaknesses
Learning Objectives 1, 2, 3
Each of the following situations has an internal control weakness.
a. Jade Applications has decided that one way to cut costs in the upcoming year is to fire the
external auditor. The business believes that the internal auditor should be able to efficiently
monitor the company’s internal controls.
b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it will not
keep copies of customer invoices related to sales revenue. Ross believes that this effort will
minimize the amount of data storage the company will have to pay for.
c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner believes
that he’s lucky that she is so committed to her job.
d. The Medicine Chest Company keeps a small petty cash fund to handle small cash
transactions. Because no one wants to volunteer to be the custodian, the business manager
has decided that all employees should have access to the petty cash. She figures that as long
as each employee fills out a petty cash ticket, then there are proper controls in place.
e. Due to the cost of maintaining the security cameras, Wings and More has decided that it will
remove the cameras that monitor the cash register.
f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring exceptionally
skilled employees who need no training to do their jobs.
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
P7-31B Accounting for petty cash transactions
Learning Objective 4
3. Cash Short & Over CR $15
On September 1, Party Salad Dressings creates a petty cash fund with an imprest balance of
$600. During September, Michael Martell, the fund custodian, signs the following petty cash
tickets:
Petty Cash Ticket
Number Item Amount
101 Office supplies $ 60
102 Cab fare for executive 25
103 Delivery of package across town 45
104 Business dinner 55
105 Merchandise inventory 75
On September 30, prior to replenishment, the fund contains these tickets plus cash of $355. 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 September 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 October 1 entry to increase the fund balance to $800. Include an explanation and
briefly describe what the custodian does.
SOLUTION
