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Practice Set
P7-37 Preparing a bank reconciliation and journal entries
This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and continued through
Chapter 6.
In March 2019, Crystal Clear Cleaning opened a new checking account at First Regional Bank. The
bank statement dated March 31, 2019, for Crystal Clear Cleaning follows:
Crystal Clear Cleaning’s Cash account in the general ledger shows the following transactions for March:
Requirements
1. Prepare the bank reconciliation at March 31, 2019.
2. Journalize any required entries from the bank reconciliation. Post to the Cash T-account to verify the
balance of the account matches the adjusted book balance from the bank reconciliation.
SOLUTION
Requirement 1
P7-37, cont.
Requirement 2, cont.
Critical Thinking
Tying It All Together Case 7-1
Buffalo Wild Wings, Inc. owns and operates more than 550 Buffalo Wild Wings, R Taco, and PizzaRev
restaurants. Additionally, the corporation has franchised restaurants in both the United States and
Canada. The corporation takes internal control responsibilities very seriously and in 2015 conducted an
assessment of the effectiveness of its internal controls over financial reporting.
Requirements
1. Review Item 9a (Controls and Procedures) of the Notes to the Financial Statements. What was the
material weakness in internal controls that Buffalo Wild Wings discovered when the company
conducted its assessment?
2. Review the auditor’s report over internal controls (p. 66 of the annual report). What did the auditor
have to say about the company’s internal controls?
3. What remedial measures does the company plan to take in order to correct the weaknesses in internal
control?
SOLUTION
Requirement 1
Requirement 2
Decision Case 7-1
Conduct an Internet search for information on internal control and the Sarbanes-Oxley Act. Write a
report of your findings. In your report, discuss some of the advantages and disadvantages of the
Sarbanes-Oxley Act. Present it to your class (if required by your instructor).
SOLUTION
Decision Case 7-2
This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas,
Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was
Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers
fill out the necessary tax forms, and he sent their documents to the home office.
Work on the motel began on April 1 and ended September 1. Each week, Slim filled out a time card of
hours worked by each employee during the week. Slim faxed the time cards to the home office, which
prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the
payroll checks, and returned to the construction site. At 5 p.m. on Friday, Slim distributed payroll checks
to the workers.
Requirements
1. Describe in detail the main internal control weakness in this situation. Specify what negative
result(s) could occur because of the internal control weakness.
2. Describe what you would do to correct the internal control weakness.
SOLUTION
Requirement 1
Fraud Case 7-1
Levon Helm was a kind of one-man mortgage broker. He would drive around Tennessee looking for
homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second
mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a
small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was
an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank
reconciliations. At some point, Patterson started “borrowing” from the business and concealing her
transactions by booking phony expenses. She intended to pay it back someday, but she got used to the
extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of
funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time,
and Helm lost everything.
Requirements
1. What was the key control weakness in this case?
2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What
can they do to compensate for this?
SOLUTION
Financial Statement Case 7-1
Accounting Firm) of Target Corporation and the Target Corporation financial statements. Answer the
following questions about the company:
Requirements
1. What is the name of Target’s outside auditing firm (independent registered public accounting firm)?
What office of this firm signed the audit report?
2. Who bears primary responsibility for maintaining effective internal control over financial reporting?
How can you tell?
3. Does it appear that Target’s internal controls are adequate? How can you tell?
4. What standard of auditing did the outside auditors use in examining the Target financial statements?
5. By how much did Target’s cash balance (including cash equivalents) change during year ended
January 30, 2016? What were the beginning and ending cash balances?
6. Review the notes to the consolidated financial statements, specifically Note 11 dealing with Cash
Equivalents. What type of instruments does Target consider to be cash equivalents?
7. Determine Target’s cash ratio as of January 30, 2016, and January 31, 2015. How do Target’s cash
ratios compare with Kohl’s Corporation as illustrated in the chapter? Explain.
SOLUTION
Requirement 1
Communication Activity 7-1
In 100 words or fewer, explain why there may be a difference between the bank statement ending cash
balance and the ending balance in the Cash account. Give at least two examples each of adjustments to
the bank balance and to the book balance.
SOLUTION
