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P7-22A Correcting internal control weakness
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.
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
Requirement 1
Requirement 2
Requirement 3
Missing Internal
Control Characteristic
Solution
a.
Assignment of responsibilities
Assign company accountants
to redesign the accounting
system. Assign programmers
to product development only.
The bank account as a control
device or competent, reliable
and ethical personnel
Deposit to a bank account
daily to utilize bank controls
over cash.
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P7-23A Accounting for petty cash transactions
Learning Objective 4
3. June 30, Cash CR $230
On June 1, Meadow Salad Dressings creates a petty cash fund with an imprest balance of $400. During
June, Al Franklin, the fund custodian, signs the following petty cash tickets:
On June 30, prior to replenishment, the fund contains these tickets plus cash of $170. 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?
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SOLUTION
Requirement 1
Maintaining the Petty Cash account at its designated balance is the nature of an imprest system. The
P7-24A Accounting for petty cash transactions
Learning Objective 4
2. June 30, Cash CR $158
Suppose that on June 1, Jammin’ Gyrations, a disc jockey service, creates a petty cash fund with an
imprest balance of $400. During June, Michael Martell, fund custodian, signs the following petty cash
tickets:
On June 30, prior to replenishment, the fund contains these tickets plus cash of $242. 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 $475. Include an explanation.
SOLUTION
Requirement 1
Before replenishment, the petty cash fund should hold cash of $250. ($400 – total payments of $150).
P7-25A Preparing a bank reconciliation and journal entries
Learning Objective 5
1. Adjusted Balance $17,010
The December cash records of Duffy Insurance follow:
Duffy’s Cash account shows a balance of $17,050 at December 31. On December 31, Duffy 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.
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Requirements
1. Prepare the bank reconciliation of Duffy Insurance at December 31, 2016.
2. Journalize any required entries from the bank reconciliation.
SOLUTION
Requirement 1
DUFFY INSURANCE
Bank Reconciliation
December 31, 2016
BANK
BOOK
Balance, December 31, 2016
$ 18,480
Balance, December 31, 2016
$ 17,050
Bank collection of note
LESS:
LESS:
Outstanding checks
Correction of book error
No. 1420
NSF check
No. 1421
EFT – insurance payment
No. 1422
Service charge
December 31, 2016
$ 17,010
December 31, 2016
$ 17,010
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Dec. 31
Cash
400
Rent Revenue
400
To record EFT rent collection.
31
Cash
Notes Receivable
To record bank collection of notes receivable.
31
Rent Expense
720
Cash
720
To record error on check 1419.
31
Accounts Receivable
600
Cash
600
To record NSF check.
31
Insurance Expense
700
700
To record EFT insurance payment.
31
Bank Expense
To record bank service charges incurred.
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P7-26A Preparing a bank reconciliation and journal entries
Learning Objective 5
1. Book Additions $2,610
The August 31 bank statement of Watson Healthcare has just arrived from United Bank. To prepare the
bank reconciliation, you gather the following data:
a. The August 31 bank balance is $5,630.
b. The bank statement includes two charges for NSF checks from customers. One is for $390 (#1), and
the other is for $140 (#2).
c. The following Watson checks are outstanding at August 31:
d. Watson collects from a few customers by EFT. The August bank statement lists a $1,700 EFT
deposit for a collection on account.
Requirements
2. Journalize any required entries from the bank reconciliation. Include an explanation for each entry.
SOLUTION
Requirement 1
WATSON HEALTHCARE
Bank Reconciliation
August 31, 2016
BANK
BOOK
Balance, August 31, 2016
$ 5,630
Balance, August 31, 2016
$ 3,100
ADD:
ADD:
Deposit in transit
EFT collection on account
$ 1,700
Bank error
Dividend revenue
Interest revenue
60
Outstanding checks
No. 237
No. 288
No. 291
LESS:
No. 294
NSF check #1
No. 295
NSF check #2
No. 296
Service charge
70
August 31, 2016
$ 5,110
August 31, 2016
$ 5,110
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Aug. 31
Cash
1,700
Accounts Receivable
1,700
To record EFT collection on account
31
Cash
Dividend Revenue
To record dividend revenue
31
Cash
Interest Revenue
To record interest revenue
31
Accounts Receivable ($390 + $140)
Cash
To record NSF checks
31
Bank Expense
Problems (Group B)
P7-27B Identifying internal control weakness in cash receipts
Learning Objective 2
Black Water Productions makes all sales on credit. Cash receipts arrive by mail. Larry Padgitt, the
mailroom clerk, opens envelopes and separates the checks from the accompanying remittance advices.
Padgitt forwards the checks to another employee, who makes the daily bank deposit but has no access to
the accounting records. Padgitt sends the remittance advices, which show cash received, to the
accounting department for entry in the accounts. Padgitt’s only other duty is to grant sales allowances to
customers. (A sales allowance decreases the customer’s account receivable.) When Padgitt 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
Requirement 1
The job of receiving customers’ payments is performed by the same person who is responsible for
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P7-28B Correcting internal control weakness
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.
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
Requirement 1
Requirement 2
Requirement 3
Missing Internal
Control Characteristic
Solution
a.
Audit
Have an external audit to
reduce the risk of false
financial statements.
d.
Assignment of responsibilities
One person should be
responsible for the petty cash
fund.
cash register and separation of
duties in regards to counting
the cash.
ethical personnel
different, so some training is
usually required for all
employees.
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P7-29B Accounting for petty cash transactions
Learning Objective 4
3. Cash Short & Over CR $10
On September 1, Top Taste Salad Dressings creates a petty cash fund with an imprest balance of $300.
During September, Michael Martell, the fund custodian, signs the following petty cash tickets:
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 $350. Include an explanation, and briefly
describe what the custodian does.
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SOLUTION
Requirement 1
Maintaining the Petty Cash account at its designated balance is the nature of an imprest system. The
Date
Accounts and Explanation
Debit
Credit
Petty Cash
Cash
Office Supplies
30
Travel Expense
25
Delivery Expense
20
Entertainment Expense
45
Merchandise Inventory
10
Requirement 4
Date
Accounts and Explanation
Debit
Credit
Oct. 1
Petty Cash
50
Cash
50
P7-30B Accounting for petty cash transactions
Learning Objective 4
2. Sep. 30, Cash CR $173
Suppose that on September 1, Rockin’ Gyrations, a disc jockey service, creates a petty cash fund with an
imprest balance of $450. During September, Ruth Mangan, fund custodian, signs the following petty
cash tickets:
On September 30, prior to replenishment, the fund contains these tickets plus cash of $277. The
accounts affected by petty cash payments are Office Supplies, Entertainment Expense, and Postage
Expense.
Requirements
1. On September 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 October 1 to increase the fund balance to $525. Include an explanation.
SOLUTION
Requirement 1
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Sep. 1
Petty Cash
450
Cash
450
Postage Expense
Entertainment Expense ($25 + $65)
Office Supplies ($30 + $15)
Cash Short & Over
173
Requirement 3
Date
Accounts and Explanation
Debit
Credit
Oct. 1
Petty Cash
75