Chap 008

Chapter 8PROBLEM SET B

Problem 8-1B (20 minutes)

1. Violates both applying technological control and effective segregation of duties. It is safe to assume that Latisha Tally has knowledge of employee passwords since she implemented the system of password protection companywide. It is a potentially insecure situation that Latisha processes payroll and can now probably change employee pay rates at will, or add a fictitious employee to the file. The company should hire an outside consultant to rework the password protection system so Latisha will not have the knowledge that she currently possesses.

2. Violates applying technological controls. The theater’s system needs to be backed up at least daily, not weekly. The theater needs to change the backup policy and make sure the backup copies are stored off premises.

3. Violates segregation of duties. The company needs to have three employees handle these functions instead of two. One employee should place purchase orders, one should receive merchandise, and the third should pay vendors.

4. Violates applying technological controls. The use of the check protector is a good internal control. However the company needs to keep the checks and check protector in a locked environment to prevent unauthorized use.

5. Violates segregation of duties. It is good internal control to separate duties for cash receipts and cash disbursements. Moreover, an employee independent of these two functions should be given the responsibility for reconciling the bank account monthly. If no employees are available, this is an acceptable duty for the owner as it allows for owner oversight, which is good internal control.

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Solutions Manual, Chapter 8 531

Problem 8-2B (30 minutes) Part 1

Mar. 5 Petty Cash..................................................................... 250 Cash......................................................................... 250 To establish the $250 petty cash fund.

Part 2Blues Music Center

Petty Cash Payments Report (for March)Delivery expense

Mar. 11 Delivery of customer's merchandise.......................... $ 10.75

Mileage expenseMar. 30 Reimbursement for mileage........................................ 56.80

Postage expenseMar. 28 Paid postage................................................................. 18.00

Merchandise inventory (transportation-in)*Mar. 6 COD charges on purchases........................................$12.50Mar. 27 COD charges on purchases........................................ 45.10 57.60

Office supplies expenseMar. 12 Purchased file folders..................................................14.13Mar. 14 Reimbursement for office supplies............................11.65Mar. 18 Purchased paper.......................................................... 20.54 46.32

Total $189.47

* Transportation-in costs are included in Merchandise Inventory under a perpetual system.


Fundamental Accounting Principles, 21st Edition532

Part 3Mar. 31 Delivery Expense..........................................................10.75

Mileage Expense..........................................................56.80Postage Expense..........................................................18.00Merchandise Inventory................................................57.60Office Supplies Expense.............................................46.32 Cash Over and Short.............................................. 1.00 Cash......................................................................... 188.47 To reimburse the petty cash fund.

Mar. 31 Petty Cash.....................................................................50.00 Cash......................................................................... 50.00 To increase the petty cash fund to $300.

Note: The two entries on Mar. 31 could be combined into one.




Part 1

Jan. 3 Petty Cash.....................................................................150.00 Cash......................................................................... 150.00 To establish the petty cash fund.

Jan. 14 Office Supplies Expense............................................. 14.29Merchandise Inventory*............................................... 19.60Repairs Expense—Computer...................................... 38.57Miscellaneous Expenses............................................. 12.82Cash Over and Short.................................................... 2.44 Cash......................................................................... 87.72 To reimburse the petty cash fund.* Transportation-in costs are included in Merchandise Inventory

under a perpetual system.

Jan. 15 Petty Cash..................................................................... 50.00 Cash......................................................................... 50.00 To increase the petty cash fund.

Jan. 31 Advertising Expense.................................................... 50.00Postage Expenses........................................................ 48.19Delivery Expense.......................................................... 78.00Cash Over and Short.................................................... 6.46 Cash......................................................................... 182.65 To reimburse the petty cash fund.**

Jan. 31 Petty Cash..................................................................... 50.00 Cash......................................................................... 50.00 To increase the petty cash fund.**

**The Jan. 31 entries can be combined into one entry.

Part 2

If the January 31 reimbursement is not made and no entry is recorded, then the expenses would not be recognized and both net income and equity would be overstated by $182.65 ($50.00 + $48.19 + $78.00 + $6.46). Also, the petty cash asset and total assets would be overstated by $182.65.



Problem 8-4B (30 minutes)Part 1

SEVERINO CO.Bank Reconciliation

December 31, 2013

Bank statement balance........... $46,822.40 Book balance.........................................................................................$32,878.30Add Add Deposit of Dec. 31................. 9,583.10 Error (Ck 1267). . $ 9.00

56,405.50 Proceeds of note less $20 fee..... 18,980.00 18,989.00

51,867.30Deduct Deduct Checks No. 1242.... $ 410.40 NSF check........ $ 762.50

1273.... 4,589.30 Printing fee........ 99.001282.... 400.00 5,399.70 861.50

Adjusted bank balance............ $51,005.80 Adjusted book balance............................................................................$51,005.80

Part 2Dec. 31 Cash...............................................................................9.00

Office Supplies....................................................... 9.00 To correct an entry error.

31 Cash...............................................................................18,980.00Collection Expense......................................................20.00 Notes Receivable.................................................... 19,000.00 To record note collection less fees.

31 Accounts Receivable—Titus Industries.....................762.50 Cash......................................................................... 762.50 To charge account for NSF check plus fees.

31 Miscellaneous Expenses.............................................99.00 Cash......................................................................... 99.00 To record check printing charge.

Part 3In a banking context, a debit memo is notification from the bank that it has debited the depositor's account. Since the depositor's account is a liability of the bank (a credit balance account), the debit notification means the bank has reduced the depositor's account balance. Conversely, a credit memo is a notification that the depositor's account has been credited, which means the bank has increased the depositor’s cash balance.




Part 1SHAMARA SYSTEMSBank Reconciliation

May 31, 2013

Bank statement balance............ $21,762.70 Book balance ........................................................................................$15,177.30Add Add Deposit of May 31................... 2,727.30

24,490.00 Proceeds of note less $50 fee.............................................................................................. 7,350.00

22,527.30Deduct Deduct Checks No. 1780....$1,425.90 NSF check.......$431.80

1786.... 353.10 Service charge.. 14.001789.... 639.50 2,418.50 Error (Ck 1788).. 10.00 455.80

Adjusted bank balance.............. $22,071.50 Adjusted book balance............................................................................$22,071.50

Part 2



May 31 Cash...............................................................................7,350.00Collection Expense......................................................50.00 Notes Receivable.................................................... 7,400.00 To record note collection less fee.

31 Accounts Receivable—W. Sox....................................431.80 Cash......................................................................... 431.80 To charge account for NSF check plus fee.

31 Miscellaneous Expenses.............................................14.00 Cash......................................................................... 14.00 To record bank service fee.

31 Utilities Expense...........................................................10.00 Cash......................................................................... 10.00 To correct an entry error.



Problem 8-5B (Concluded)

Part 3

There are several possible reasons why some prenumbered checks are missing from the sequence of canceled checks returned with a bank statement. Reasons include:

(1) Some of the checks in the numbered sequence may have cleared the bank in a previous period and were returned with the bank statement in that previous period.

(2) Some of the checks in the numbered sequence may remain outstanding. If so, they will be returned with the bank statement in a later period when they clear the bank.

(3) The issuer of the checks may have voided one or more of the checks in the numbered sequence, perhaps because of making an error in writing the checks.

(4) Occasionally, a check will reach the bank but the bank will incorrectly charge the check to the wrong account. When the bank detects the error, it will return the check separately with a note of explanation to the depositor.



Documents

Chap 008