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Copyright © 2007 by McGraw -Hill Ryerson Limi ted. All rig hts reserved.

Solutions Manual for Chapter 9 799

Chapter 9 Int ernal Control and Cash

Questions

1. Most liquid is cash. Least liquid is a building.

2. Ensure transactions and activities are authorized, maintain records, insure assets, bondemployees, separate recordkeeping and custody, establish separation of duties, applytechnological controls, and perform internal and external audits.

3. Separation of custody from recordkeeping encourages the custodian to avoid

misplacing, misappropriating, or wasting the asset. This arrangement makes collusionnecessary if an asset is to be stolen and the theft concealed in the records.

4. Internal control procedures become critical when the manager of a business can nolonger control the business through personal supervision and direct participation in itsaffairs.

5. Responsibility for a sequence of related transactions should be divided so that the workof one department or individual acts as a check on that of another.

6. Depositing all receipts intact on the day of receipt creates an independent record of theamount of cash received and helps prevent an employee from having personal use ofthe money for a few days before depositing it.

7. If department managers were permitted to deal directly with the suppliers, the amount of

merchandise purchased and the resulting liabilities would not be well controlled. Havingdepartment managers place orders through a purchasing department helps control theamounts purchased and the resulting liabilities.

8. A petty cash receipt is a document stating that a payment has been made from pettycash. The person who received payment signs the receipt.

9. $21,193,000.

10. ($259,640,000 ÷ $2,213,092,000) × 100 = 11.73 %.



Copyright © 2007 by McGraw -Hill Ryerson Lim ited. All ri ghts r eserved.

800 Fundamental Account ing Principles, Twelfth Canadian Edition

QUICK STUDY

Quick Study 9-1

a. The main objective of internal control is to safeguard the assets of the business.This objective is best accomplished by designing an operational system withmanagerial policies that protect the assets from waste, fraud, and theft. Thesystem should be designed in compliance with the seven broad principles of internal control.

b. The separation of recordkeeping from the custody over assets is intended toreduce fraud. If this fundamental principle is followed, there has to be collusionbetween two or more employees for assets to be stolen and the theft to beconcealed in the records .

c. Your supervisor’s lack of concern is suspicious. The supervisor had controlover both the custody and recording of bus passes; this lack of separation of duties represents poor internal controls. You have identif ied 1,251 (9,820 – 9,750= 71; 11,750 – 11,012 = 739; 22,440 – 22,000 = 441) missing bus passes at $50each for a total value of $62,550. You have an obligation to report thisirregularity to both your work experience advisor at the college and your supervisor’s superior si nce your supervisor is not willing to deal appropriatelywith the issue.

Quick Study 9-2

a. The basic guidelines for safeguarding cash are: (1) to separate the duties of those who handle cash and those that keep cash records, (2) require thatreceipts be deposited intact daily, and (3) require that all disbursements aremade by cheque.

b. The organization may be small and the separation o f duties may be difficu lt.However, wherever possib le, tasks should be segregated. Also, period ic checksshould be made by an independent party to ensure procedures are beingfollowed. Members could deposit their collections directly (no withdrawalprivileges) and report the details to the recordkeeper. Restrictions could be

placed on the bank account such that withdrawals can be made only via acheque requiring two signatures to ensure cheques are being written for authorized expenditures only.





Quick Study 9-3

1.

May 1 Petty Cash...................................................................... 75.00Cash ...................................................................... 75.00

To record establishment of fund.

2.Wee Ones Agency

Petty Cash Payments ReportMay 1 – 31, 2011

Receipts:Entertainment expense

Film rentals ......................................................... $19.4

0Refreshments for meeting.............................. 22.81 $42.21

Postage expense .................................................... 6.95Print ing expense..................................................... 13.10

Total receipts ................................................................... $62.26Fund total ......................................................................... $75.00

Less: Cash remaini ng .................................................. 12.74Equals: Cash requi red to rep len ish pet ty cash..... 62.26Cash over/(short ) ............................................................ $ -0-

May 31 Entertainmen t Expense.............................................. 42.21Postage Expense ......................................................... 6.95Printing Expense.......................................................... 13.10

Cash ...................................................................... 62.26To reimburse the fund.

3. The Petty Cash account is credited when the size of the fund is being reduced or the fund is being eliminated.

Quick Study 9-4

Mar. 17 Printing Expense.......................................................... 75.00Tax i Expense ................................................................ 48.00Delivery Expense ......................................................... 55.00Cash Over and Short ................................................... 3.00

Cash ...................................................................... 181.00To reimburse the fund.





Quick Study 9-5

Sept . 23 Entertainmen t Expense.............................................. 32.00Computer Repair Expense ........................................ 45.00Delivery Expense ......................................................... 18.00

Cash Over and Shor t......................................... 2.00Cash ...................................................................... 93.00

To reimburse the fund.

Quick Study 9-6

Feb . 1 Cash ................................................................................ 73,125Credit Card Expense................................................... 1,875

Sales ....................................................................... 75,000To record sale of merchandise less credit card expense; 75,000 x 2.5% = 1,875.

1 Cost of Goods Sold ..................................................... 62,000Merchandise Inventory ...................................... 62,000

To record cost of sales.

10 Cash ................................................................................ 28,000Sales ....................................................................... 28,000To record sale of merchandise to cash customers.

10 Cost of Goods Sold ..................................................... 23,000Merchandise Inventory ...................................... 23,000






Quick Study 9-7

Oct. 1 Cash ................................................................................ 13,965

Debi t Card Expense .................................................... 35Sales ....................................................................... 14,000

To record sale of merchandise less debit card expense 14,000 x ¼% = 35.

1 Cost of Goods Sold ..................................................... 8,000Merchandi se Inventory ...................................... 8,000


7 Cash ................................................................................ 3,500Sales ....................................................................... 3,500

To record sale of merchandise to cash customers.



Quick Study 9-8

Part 1 Part 2

a. Bank; add —b. Book ; add JE requiredc. Book; add JE requiredd. Book; subtract JE requirede. Bank; subt ract —f. Book; subtract JE requiredg. Book; subtract JE required





Quick Study 9-9

BOLTON COMPANY

Bank Reconci liationOctober 31, 2011

Bank statemen t balance ................ $15,400 Book balance ........................ $13,150 Add:

Outstand ing depos it .................... 1,200$16,600

Deduct:Outstanding cheques:

#150: $ 980#169: 2,515 ............................. 3,495

Deduct:Service charge...................

45

Adjusted bank balance .................. $13,105 Adjusted book balance ...... $13,105

Oct. 31 Servi ce Charge Expense ..................................... 45Cash..................................................................... 45

To record bank service charge.

*Quick Study 9-10Company A’s Acid-test Ratio Company B’s Acid -test Ratio

1,200 + 2,700 = 1.16 1,200 + 2,700 = 0.683,100 + 250 4,750 + 950

Company A would be grantedcredit because the acid -test ratio isgreater than 1.

Company B would not be grantedcredit because the acid -test ratio isless than 1 indicating poss ibleliquidity problems.





EXERCISES

Exercise 9-1 (10 minutes)Lombard Company’s internal control system failed to require a separation of assetcustody and recordkeeping. The bookkeeper should not have been allowed to signthe company’s cheques. In addition, since a loss was incurred, the companyapparently had not bonded its employee. Otherwise, the loss wou ld have been insu redby the bonding company. Finally, if regular, independent reviews of the accountingrecords had been done, the payments of salary cheques to a nonemployee may havebeen discovered sooner.

Exerci se 9-2 (15 minutes)

You have several concerns. First, there is no mechanism in the parking meters to trackthe input of coins (a meter reading that could be documented and subsequentlyverified against the collection); this means there is no verifiable means by which toreconcile the contents of each meter. Second, because of the first shortcoming, theemployee emptying the contents of the meters could withhold some of the coins sincethe dollar value cannot be verified. Third, the canvas bag is not secure; it can beopened at any time by an unauthorized individual. Fourth, after emptying severalparking meters, the contents of each canvas bag can easily exceed a thousanddollars; there is a safety ri sk to a lone employee carrying a canvas bag of money.

To correct the situation, optimally, the parking meters should be mechanized such that

the contents can be reconciled. However, a major investment in new parking metersseems unlikely, therefore, civic employees collecting coins from parking metersshould operate in pairs; there is less risk of fraud if two employees are responsible for emptying the parking meters (unless there is collusion). The canvas bag used tocollect the coins is also problematic. It should be redesigned so that coins can go inbut c annot be removed unless done so by an authorized individual. Finally, for safetyof the individuals invo lved and for security over the coins, full moneybags should notbe stored in an unattended vehicle. Full moneybags shou ld be transferred to a securelocation immediately; arrangements could be made with an armored vehicle torendezvous with the pair of employees regularly at specified points along the route.





Exercise 9-3 (15 minut es)a. If a cash register cannot be used, the total sales value of the shirts and sunglasses

given to the employee each day should be calculated. Then, the employee shouldsign a receipt fo r the merchandise and the amount of cash that he or she has beengiven. At the end of each day, the employee should be required to return cash plusremaining shirts and sunglasses equal to the amount taken to the stand.

b. The employee should sign a receipt for the total amount of cash he or she is giveneach weekend. Then, each time the employee makes a purchase, he or she shou ldobtain a signed sales receipt for the payment. The sales receipt should list theitems purchased and the prices paid. When the employee returns to the businessoffice, the total value of the signed sales receipts plus any remaining cash shouldequal the amount of cash originally given to the employee. Also, the merchandisebrought back by the employee should be the same as the items listed on the

signed sales receipts .

Exercise 9-4 (15 minut es)

The internal control problem is that the bookkeeper has physical contro l over the cashreceipts and also has control over the accounting records. Nothing in the systemprevents the bookkeeper from taking cash from the mail and using it personally. Thebookkeeper migh t delay recording the cash receipt f rom a cus tomer until more cashcomes in at a later date from a second cus tomer. Then, the new cash receipt would bedeposited and recorded as a payment made by the fir st cus tomer. No entry wou ld bemade in the second customer’s account until cash was received from a third customer.

(This type of fraud is called “lapping.”) Also, the bookkeeper may pocket cash andclaim that a payment was never received and apparently lost in the mail.

If only one person i s present when the mail is opened, that person may steal cash andclaim it was never received. If possib le, two people should be present. Otherwise, thehonesty and integrity of the person chosen to open the mail is critical. Mostimportantly , the bookkeeper should not have physical control over cash.





Exercise 9-5 (20 minutes)

Part 1

a.Jan. 1 Pet ty Cash ..................................................................... 200.00

Cash ........................................................................ 200.00To establish the fund.

b.Eanes Co.

Petty Cash Payments ReportJanu ary 1 – 8, 2011

Receipts:Postage expense .................................................... $64.00Merchandise inventory ......................................... 19.00

Store supplies.......................................................... 36.50Jim Eanes, Withdrawals ........................................ 53.00

Total receipts ................................................................... $172.50Fund total ......................................................................... $200.00

Less: Cash remaining .................................................. 27.50

Equals: Cash requi red to rep len ish pet ty cash..... 172.50Cash over/(short ) ............................................................ $ -0-

Jan. 8 Postage Expense......................................................... 64.00Merchandise Inventory .............................................. 19.00

Sto re Supp lies Expense*........................................... 36.50Jim Eanes, Withdrawals ............................................. 53.00Cash ........................................................................ 172.50


Part 2 Jan. 8 Postage Expense......................................................... 64.00

Merchandise Inventory .............................................. 19.00Store Supp lies Expense*........................................... 36.50Jim Eanes, Withdrawals ............................................. 53.00Pet ty Cash ..................................................................... 300.00

Cash ........................................................................ 472.50To reimburse the fund and increase it by $300.

Analysis Component If the January 8 entry to reimburse the fund was not recorded, net income would beoverstated.





* Either Store Supplies Expense (an expense) or Store Supplies (an asset) could bedebited. However, if supplies are being purchased through Petty Cash it is likely thatthey are for immediate use which jus tifi es using an expense account over an asset.






a.

Sept. 9 Pet ty Cash ..................................................................... 400.00Cash ........................................................................ 400.00

To establish the fund.b.

Brady CompanyPetty Cash Payments Report

September 9 – 30, 2011Receipts:

Merchandise inventory ........................................ $32.45

Office supplies........................................................ 113.55

Repairs expense.................................................... 87.60Total receipts .................................................................. $233.60) Fund total ........................................................................ $400.00

Less: Cash remaining ................................................. 146.40Equals: Cash required to replenish petty cash .... 253.60) Cash over/(short ) ........................................................... ($ 20.00)

Sept . 30 Merchandise Inventory .............................................. 32.45Offi ce Supp lies Expense*.......................................... 113.55

Repairs Expense.......................................................... 87.60Cash Over and Shor t .................................................. 20.00Pet ty Cash ............................................................. 100.00Cash ........................................................................ 153.60

To reimburse the fund and decrease it by $100.

Analysis component: There are several things that cou ld be done. The Marketing Manager should reviewthe prior month’s petty cash journal entries to determine if t he shortage is an anomalyor a recurr ing event. Hopefully it i s an anomaly but , regardless, the manager will need

to question the Petty Cash Custodian about the $20 cash shortage recorded inSeptember. It is important to recognize that honest errors do occur. It is also possiblethat the Petty Cash Custodian requires training to help him manage the petty cashfund. If it is determined that the error was based on dishonesty, appropriate action willhave to be taken (which normally results i n the dismissal of the employee as aminimum).





* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could bedebited. However, if supplies are being purchased through Petty Cash it is likely thatthey are for immediate use which justif ies using an expense account over an asset.






a.

Oct. 31 Cleaning Expense ......................................................... 120.00Postage Expense........................................................... 79.00Delivery Expense ........................................................... 60.00

Cash Over and Short .......................................... 4.00Cash ........................................................................ 255.00


b.Nov. 30 Computer Repair Expense .......................................... 75.00

Entertainment Expense................................................ 156.00Cash Over and Shor t .................................................... 2.00

Cash ......................................................................... 233.00To reimburse the fund.

c.Dec. 31 Gas Expense................................................................... 80.00

Offi ce Supp lies Expense*............................................ 140.00Entertainmen t Expense................................................ 62.00Pet ty Cash ....................................................................... 100.00

Cash ......................................................................... 382.00To reimburse and increase the fund.

* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could bedebited. However, if supplies are being purchased through Petty Cash it is likely thatthey are for immediate use which jus tifi es using an expense account over an asset.





Exercise 9-8 (20 minut es)

Oct . 1 Cash ................................................................................ 104,475

Debit Card Expense .................................................... 525Service Rev enue.................................................. 105,000

To record sale of services less debit card expense; 0.5% x 105,000 = 525.

7 Cash ................................................................................ 37,000Service Rev enue.................................................. 37,000

To record sale of services provided for cash.

8 Cash ................................................................................ 59,780Credit Card Expense................................................... 1,220

Service Rev enue.................................................. 61,000To record sale of services less credit card expense; 2% x 61,000 = 1,220.

10 Accounts Receivab le – Edson CHC........................ 84,000Service Rev enue.................................................. 84,000

To record sale of services.

25 Cash ................................................................................ 80,320Sales Discounts ........................................................... 3,680

Accounts Receivab le – Edson CHC................ 84,000To record collection of Oct. 10 credit sale; 2% x 84,000 = 3,680.





Exercise 9-9 (30 minutes) Jan. 15 Cash ................................................................................ 56,000

Sales ....................................................................... 56,000To record sale of merchandise to cash customers.



17 Accoun ts Receivable.................................................. 15,800Sales ....................................................................... 15,800

To record sale of merchandise on terms 2/10, n30.



20 Cash ................................................................................ 111,720Credit Card Expense................................................... 2,280

Sales ....................................................................... 114,000To record sale of merchandise less credit card expense; 114,000 x 2% = 2,280.

20 Cost of Goods Sold ..................................................... 74,100Merchandi se Inventory ...................................... 74,100To record cost of sales.

25 Cash ................................................................................ 71,640Debit Card Expense .................................................... 360

Sales ....................................................................... 72,000To record sale of merchandise less debit card expense; 0.5% x 72,000 = 360.

25 Cost of Goods Sold ..................................................... 46,800

Merchandi se Inventory ...................................... 46,800To record cost of sales.





Exercise 9-9 (concluded)

Analysis component

Cash sales wou ld be preferable, however, often it is not convenient for cus tomers.The inconvenience of cash might prevent customers from making purchases if that was the only means of payment accepted by LenCon. Credit sales allowcustomers to purchase on impulse. However, two disadvantages: receipt of cashby LenCon is delayed and credit sales require administrative time to monitor thetimely collection from credit customers. Debit cards have the advantage of allowing customers to make impulse purchases but only if the cash balance isavailable in their bank account. Debit cards are also comparable to cash (nosubsequent collection required) but the bank does charge a fee for this servicealthough it is normally signif icantly less than the fee charged by banks for creditcard transactions . Bank credit cards have the advantages of cash being col lectedby LenCon immediately (positive effect on cash flow) and customers are limitedonly to their credit card limit (not their bank account balance); customers arebuying on credit but the risk of collection is transferred to the credit cardcompany. The disadvantage of credit cards is the fee charged by theadministering bank. LenCon will likely accept all forms of payment to enhancesales and in so doi ng recognize the costs and r isks of each.






1.

PELZER HOLDINGSBank Reconci liation

July 31, 2011

Bank statement balance ................ $9,848 Book balance ........................ $9,740 Add:

Outstanding deposit ....................Bank erro r (Pelt za cheque).........

572560

$10,980Deduct:

Outstand ing ch eques:

#14: $ 600#54: 140................................ 1,480

Deduct:NSF — Jim Anderson .......

240

Adjusted bank balance .................. $9,500 Adjusted book balance ...... $9,500

2.July 31 Accounts Receivable – Jim Anderson............. 240

Cash..................................................................... 240To reinstate customer account.

Analysis component

If the journal entry in (2) is not recorded, net income, liabilities, and owner’s equitywould not be affected. Assets would be increased and decreased by the same amoun tcausing a net change of zero.


MEDLINE SERVICE CO.Bank Reconciliation

Ju ly 31, 2011

Bank statement balance ........... $10,332 Book balance of cash ............. $11,352

Add:................................................. Add:Deposi t of Ju ly 31 ................ 2,724 Error on Ch. No. 919........ 9$13,056 $11,361

Deduct:........................................... Deduct:Outstand ing cheques......... 1,713 Bank serv ice charge....... 18

Adjusted bank balance .............. $11,343 Ad justed book balance.......... $11,343





Exercise 9-11 (concluded)

b.July 31 Cash ................................................................................ 9

Utili ti es Expense .................................................. 9To correct error.

31 Bank Serv ice Charges Expense .............................. 18Cash ........................................................................ 18

To record bank service charges.

Analysis component If the journal entries in part (a) were not recorded, net income, assets, and owner’sequity would each be overstated by a net amount o f $9 ($18 - $9 = $9); liabilities arenot affected by the entries in (a).






Not Shown

Bank Balance Book Balance on the Must Reconcil-

Add Deduct Add Deduct Adjust iation 1. Interest earned on the accoun t. x Dr.2. Depos it made on September 30

after the bank was closed. x3. Cheques outstanding on Augus t

31 that cleared the bank inSeptember. x

4. NSF cheque from customer returned on September 15 butnot recorded by the company. x Cr.

5. Cheques written and mailed topayees on September 30. x

6. Depos it made on September 5that was processed onSeptember 8. x

7. Bank service charge. x Cr.8. Cheques written and mailed to

payees on October 5. x9. Cheque writ ten by another

depositor bu t charged againstthe company's account. x10. Principal and interest

collected by the bank but notrecorded by the company. x Dr.

11. Special charge for collectionof no te in No. 10 on company'sbehalf . x Cr.

12. Cheque writ ten against theaccount and cleared by thebank; erroneously omitted by

the boo kkeeper. x Cr.





*Exercise 9-13 (15 minutes)

Case X Case Y Case Z

Cash ...................................................... $ 800 $ 910 $1,100Short-term investments ................... -0- -0- 500

Accounts receivable......................... -0- 990 800Quick assets ....................................... $ 800 $1,900 $2,400

Cur ren t liabil ities................................ $2,200 $1,100 $3,650

Ac id-test rat io ..................................... 0.36 1.73 0.66

Case Y exhibits the superior ability to meet short-term obligations as they come due.The acid -test ratio o f 1.73 exceeds the common benchmark o f 1.0. Cases X and Z fallshort of the 1.0 benchmark.





PROBLEMS

Problem 9-1A (20 minutes)

1. Violates the principle of establishing responsibil ity. Only Jill should have access tothe petty cash fund since she is the custodian. The company should implement apolicy of not allowing petty cash transactions over the lunch hour.

2. Violates applying technological controls. While the daily backup is a very goo dinternal control the tape needs to be taken off the premises every night. If thebuilding and computer are destroyed the data will be able to be restored from thetape that was kept safe off the premises. The company should implement a policyof storing tapes off the premises nightly.

3. Violates regular and independent review. Jack Mawben needs to implement a wayto regularly and independently review his employees. Hiring of internal auditors or

an outside consultant to objectively review the internal controls and employee’swork needs to be implemented.4. Violates insuring of assets and bonding of key employees. We do not have enough

information to know if the company can afford the move to the higher deductible onthe property insurance. However, we can say that dropping the insurance for bonding the employees weakens internal control. If the company does need toengage in cost cutting they should do it without compromising their internalcontrols. The insurance for the bonding o f key employees should be reinstated.

5. Violates separation of duties. The company shou ld implement a poli cy whereby theperson recording incoming cash receipts is not responsible for posting thepayment to the customer accounts.





Problem 9-2A (30 minutes) Part 1

Feb . 2 Petty Cash ............................................................... 350

Cash .................................................................. 350To establish the fund.

Part 2

PALLADIUM ART GALLERYPetty Cash Payments Report

February 2 – 28, 2011Receipts:

Delivery expenseFeb. 23 Delivery of customer’s

merchandise......................................................

$18.00

Auto expenseFeb. 14 Reimbursement for businessauto expense.....................................................

100.00

Postage expenseFeb. 12 Express del ivery of contract ......... $

9.9528 Purchas ed s tamps............................

64.0073.95

Transportation-in (Merchandise Inventory)Feb. 9 COD charges on purchased

merchandise......................................

$22.50

25 COD charges on purchasedmerchandise.....................................

15.10 37.60

Office suppliesFeb. 5 Purchased paper for copier......... $10.1

320 Purchased stationery.....................

77.7687.89

Total receipts ................................................................... $317.44

Fund total .........................................................................$350.00

Less: Cash remaining .................................................. 29.23Equals: Cash requi red to rep len ish pet ty cash..... 320.77Cash over/(short ) ............................................................ ($ 3.33)





Problem 9-2A (concluded)

Part 3

Feb. 28 Delivery Expense ................................................... 18.00 Auto Expense ......................................................... 100.00Postage Expense................................................... 73.95Merchandise Inventory ........................................ 37.60Offi ce Supp lies Expense*.................................... 87.89Cash Over and Shor t ............................................ 3.33Pet ty Cash ............................................................... 50.00

Cash .................................................................. 370.77To reimburse fund and increase it by $50.

Analysis component This is a sensitive situation. Receipts are integral to authenticating accountingtransactions (objectivity principle). You should first question the person involved togive them an opportunity to provide an explanation even if it is your direct supervisor.If the explanation you receive is not satisfactory, you should then raise your concernswith the gallery owner citing the manager’s response to your question. It is then theowner’s responsib ili ty to investigate and/or take action as they deem appropriate.However, you have an ethical duty to do something; doing nothing is not an option.

* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could be

debited. However, if supplies are being purchased through Petty Cash it is likely thatthey are for immedia te use which justi fies using an expense account over an asset.






Apr. 1 Petty Cash ............................................................... 250.00

Cash .................................................................. 250.00To establish fund.

15 Advertising Expense ............................................ 57.15Jani tor ial Expense................................................. 78.00Postage Expense................................................... 43.50Off ice Suppl ies Expense*.................................... 63.68Petty Cash ............................................................... 200.00

Cash Over and Short .................................... 3.48Cash .................................................................. 438.85

To reimburse fund and increase it by $200.

30 Delivery Expense ................................................... 39.75 Auto Expense ......................................................... 28.50Offi ce Supp lies Expense*.................................... 48.36

Petty Cash ....................................................... 50.00Cash .................................................................. 66.61

To reimburse fund and decrease it by $50.

Analysis component

If the April 30 replenishment is not made and no entry is recorded, several expenses

would not be recognized and net income and owner’s equity would be overstated by$116.61 ($48.36 + $28.50 + $39.75). Similarly, the petty cash asset and total assetswou ld be overstated by $116.61.

Even though the April 30 entry shows a debit to Office Supplies instead of OfficeSupplies Expense, the expense would turn out to be understated without this entry.This result occurs because the expense equals the difference between the unadjustedOffice Supplies account balance and the count of of fice supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supp lies expense will be understated.

* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could bedebited. However, if supplies are being purchased through Petty Cash it is likely thatthey are for immediate use which just ifies us ing an expense account over an asset.






a.

DARTMOUTH COMPANYBank Reconciliation

June 30, 2011

Bank statement balance ............ $8,379.34

Book balance.................... $4,941.69

Add: Add:Depos it of June 29 .................. 2,220.85 Error , cheque no. 887. 1,000.00

10,600.19 Error , cheque no. 891. 100.00Deduct: $6,041.69

Outstanding cheques:No. 888.......... 1,186.30 Deduct:No. 890.......... 1,146.40 Bank servi ce charges. 45.70No. 892.......... 1,106.70No. 893.......... 1,164.80 4,604.20

Adjusted bank balance .............. $5,995.99

Adjusted book balance .. $5,995.99

b.

June 30 Cash .................................................................................. 1,000.00Office Supplies ....................................................... 1,000.00To account for error in Cheque #887.

30 Cash .................................................................................. 100.00Utili ti es Expense .................................................... 100.00

To account for error in Cheque #891.

30 Bank Servi ce Charge Expense................................... 45.70Cash .......................................................................... 45.70

To record bank service charges for June.

Analysis component: Because your posi tion does not represent good internal control s (writing andrecording of cheques should be segregated, if possible, from the preparation of thebank reconciliation), there is the potential for fraud. You should review the journalentry regarding cheque #882 to determine who the payee is. This information, alongwith the fact that the June bank statement had been mailed to the former employee’shome, should be brought to the supervisor’s attention. Prior bank reconciliationsshould be reviewed to determine if this is a recurring sit uation. If confl icting duties





cannot be segregated in future, the bank reconciliations should be reviewed regularlyby a supervisor/owner of the business.


a)HOLLIDAY ADVENTURES

Bank Reconci liation Apr il 30, 2011

Bank statement balance ............ $46,904 Book balance.............. $42,916 Add:

Interest revenue ..... $94Error Chq #93.......... 198 292

$43,208Deduct: Deduct:

Outstand ing cheques: NSF ............................ $824#79................. $5,200 Payment ................... 4,200#91................. 800 Interest Expense .... 640#96................. 640 Service Charge ....... 80 5,744#100............... 2,800 9,440

Adjusted bank balance .............. $37,464 Ad justed book balance ........ $37,464

b) Apr. 30 Cash .................................................................................. 94Interest Revenue.................................................... 94

To record interest earned.

30 Cash .................................................................................. 198Delivery Expense ................................................... 198

To account for error in Cheque #93.

30 Accounts Receivab le – Jon Smith ............................ 824Cash .......................................................................... 824

To reinstate customer account .

30 Loan Payable .................................................................. 4,200Cash .......................................................................... 4,200

To record Apr il loan payment.

30 Interest Expense............................................................ 640Cash .......................................................................... 640

To record April interest expense.





30 Bank Serv ice Charges Expense ................................ 80Cash .......................................................................... 80

To record Apr il bank charges.


DEWEERD COMPANYBank Reconciliation

October 31, 2011

Bank statement balance ............ $56,040 Book balance of cash ........... $52,796 Add: Add:

Deposit of October 31............. 20,304 Proceeds of no te lesscollection charge$76,344

($18,000 – $90).................... 17,910$70,706

Deduct: Deduct:Cheques No. 3031 ..... $2,760 NSF cheque and fee —

3065....... 672 Jef ferson Tyler .....$1,6103069....... 4,296 7,728 Service charge.......... 30

Error recording ChequeNo. 3056.................. 450 2,090

Adjusted bank balance .............. $68,616 Ad justed book balance ........ $68,616

Part 2

Oct. 31 Cash ...................................................................................... 17,910Collection Expense ........................................................... 90

Notes Receivable....................................................... 18,000To record col lection of note less collection fee.

31 Accounts Receivable—Jefferson Tyler ....................... 1,610Cash .............................................................................. 1,610

To record NSF cheque.

31 Bank Serv ice Charges Expense .................................... 30Cash .............................................................................. 30

To record bank service charges.

31 Rent Expense ..................................................................... 450Cash .............................................................................. 450

To correct error.






Analysis component a. If the company’s Cash account balance of $52,796 is li sted on the bank

reconciliation as $52,697, the final balance that results from adjusting the bankstatemen t balance will not be affected by the error. However, the final balance thatresults from adjusting the book balance of cash will be understated by $99($52,796 – $52,697).

b. The bank’s col lection of a $18,000 note less the $90 coll ection fee shou ld havebeen added to the book balance of cash. Instead, it was added to the bankstatement balance. As a result, the final balance that results from adjusting the

bank statement balance will be overstated by $17,910 and the final balance thatresults from adjusting the book balance will be understated by $17,910. Therefore,the totals will be out by $35,820 because, if it is on the wrong side, it has adoubling effect.






MORGAN COMPANYBank ReconciliationSeptember 30, 2011

Bank s tatement balance .......... $36,727.10 Book balance of cash ......... $35,075.00 Add: Add:

Deposi t of September 30 ..... 3,165.50 Interest earned ................. 45.00Proceeds of note less

$39,892.60 collect ion fee ........................ 2,770.00$37,890.00

Deduct: Deduct:Cheques No. 5893...... $968.50 NSF cheque —5906...... 1,718.60 Delia Hahn .........$1,176.505908...... 552.00 3,239.10 Error on Cheque

No. 5904 ............. 60.00 1,236.50 Adjusted bank balance $36,653.50 Ad justed book balance.. $36,653.50

Part 2

Sept. 30 Cash .......................................................................... 45.00Interest Revenue............................................ 45.00

To record interest earned.

30 Cash .......................................................................... 2,770.00Collection Expense ............................................... 30.00

Notes Receivable ........................................... 2,800.00To record col lection of note less collection fee.

30 Accounts Receivable—Delia Hahn ................... 1,176.50Cash .................................................................. 1,176.50

To record NSF cheque.

30 Compu ter Equipment ........................................... 60.00Cash .................................................................. 60.00

To correct error.






Analysis component

There are several possible reasons why the cancelled cheques returned with a bankstatement may not be numbered sequentially. Common reasons for this include thefollowing:— Some of the cheques in the numbered sequence may have cleared the bank in a

previous period and been returned with the bank statement in that previousperiod.

— Some of the cheques in the numbered sequence may remain outstanding. If so,they will be returned with the bank statement in a later period when they clear thebank.

— The issuer of the cheques may have voided one or more of the cheques in the

numbered sequence, perhaps because of making an error i n wri ting the cheques.— Occasionally, a cheque will reach the bank but the bank wil l incorrectly charge thecheque to the wrong account. When the bank detects the error, it will return thecheque separately with a note of explanation.


a)OZZIE MINING

Bank Reconciliation Apri l 30, 2011

Bank statement balance ............... $52,660 Book balance.......................... $50,120 Add:

Deposit of Apr il 30 in transi t..... 26,000 Add:

Owner Inv estmen t.............. 50,000Error (Chq #28: 16,400 – 10,400)

6,000 $100,120$84,660

Deduct: Deduct:Outs tand ing cheques: NSF — Don James ...... $8,000

#14 ............ $3,200 Serv ice charge............. 240

#22 ............ 6,400 Interest expense ......... 1,000#25 ............ 2,000 Payment ........................ 20,000 29,240#27 ............ 1,300#30 ............ 200#32 ............ 680 13,780

Adjusted bank balance ................. $70,880 Adjusted book balance ........ $70,880






b )

Apr. 30 Accounts Receivab le – Don James ............................ 8,000Cash ............................................................................ 8,000


30 Bank Serv ice Charges Expense .................................. 240Cash ............................................................................ 240

To record April bank service charges.

30 Interest Expense.............................................................. 1,000Cash ............................................................................ 1,000

To record April interest expense.

30 Note Payable ..................................................................... 20,000Cash ............................................................................ 20,000

To record April payment on note.

30 Cash .................................................................................... 50,000Walt Ozzie, Capital ................................................... 50,000

To record investment by owner.






a)

RED SEA COMPANYBank ReconciliationNovember 30, 2011

Bank statement balance ............. $112,548.40

Book balance ......................... $98,356.44*

Add:Deposit of Nov 30 in transit.... 3,830.80

Add:Interest revenue ................ 2,400.00

$116,379.20

$100,756.44

Deduct:Outstanding cheques:#1224........ $3,270.58#1230........ 4,936.60#1232........ 7,250.30#1233........ 964.34 16,421.82

Deduct:NSF ....................... $744.26Service charge... 54.80 799.06

Adjus ted bank balance ............... $99,957.38 Adjusted book balance ....... $99,957.38

* Oct 31 adjusted balance of $ 83,695.70Add: November receipts 347,047.82Less: November disbursements 332,387.08November 30 unadjus ted balance $ 98,356.44

b)Nov . 30 Bank Serv ice Charges Expens e ........................ 54.80

Cash .................................................................. 54.80To record November bank charges.

30 Accounts Receivable – Trevor Clerk ................ 744.26Cash .................................................................. 744.26


30 Cash .......................................................................... 2,400.00Interest Revenue............................................ 2,400.00

To record interest earned in November.






Part 1

DUNDEE REALTYBank Reconciliation

October 31, 2011

Bank statement balance ............. $48,260 Book balance................................. $38,535 Add:

Deposit of October 31 intransit ....................................... 2,300

Error ............................................. 1,700$52,260

Add:Error (A/P: 980 – 890)........ 90Note Receivable ................5,000

Less : Collection Fee.... 45Int eres t Revenue............... 350 5,395

43,930Deduct:Outstanding cheques:

#2033................ $3,200#2099................ 850#2300................ 1,800#2345................ 5,400 11,250

Deduct:Servi ce charge...................$ 220Error (18,500 – 15,800).....2,700 2,920

Adjus ted bank balance ............... $41,010 Adjusted bank balance ............... $41,010






Part 2 Oct. 31 Bank Servi ce Charges Expense ............................ 220

Cash ...................................................................... 220To record October bank charges.

31 Accounts Receivable – Teresa Krant ................... 2,700Cash ...................................................................... 2,700

To correct error.

31 Cash.............................................................................. 90

Accounts Payable – Decker Company ......... 90To correct error.

31 Cash.............................................................................. 5,305Collection Expense................................................... 45

Note Receivable ................................................. 5,000Interest Revenue................................................ 350

To record col lection of note plus interest earned less collection expense.

Analysis component If the entries in Part 2 are not recorded, net income and owner’s equity wou ld be under-stated by $85 ($350 – $220 – $45 = $85), assets would be understated by $175 (–$220 –$2,700 + $2,700 + $90 + $5,305 – $5,000 = $175), and l iabi li ties would be understated by$90.

ed larsonsol 09

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