SOLUTIONS TO EXERCISES—SET B

EXERCISE 8-1B

1. Establishment of responsibility. The counter clerk is responsible for

handling cash. Other employees are responsible for making the food.

2. Segregation of duties. Employees who make the food do not handle cash.

3. Documentation procedures. The counter clerk uses your order invoice

(ticket) in registering the sale on the cash register. The cash register
produces a tape of all sales.

4. Physical, mechanical, and electronic controls. A cash register is used to

record the sale.

5. Independent internal verification. The counter clerk, in handling the food,

compares the contents of the bag with the items indicated on the order
invoice.

6. Other controls. No visible application possible.

EXERCISE 8-2B

(a) (b)
Recommended
Procedure Weakness Principle Change
1. Inability to Establishment There should be
establish of responsibility. separate cash
responsibility drawers and
for cash with register codes
a specific clerk. for each clerk.

2. Cash is not Physical, Cash should be

adequately mechanical, stored in a safe
protected and electronic until it is deposited
from theft. controls. in bank.

© 2008 For Instructor Use Only 8-1

EXERCISE 8-2B (Continued)

(a) (b)
Recommended
Procedure Weakness Principle Change
3. Cash is not Independent A cashier office
independently internal supervisor should
counted. verification. count cash.

4. The bookkeeper Segregation The cashier’s

accountant of duties. department should
should not make the deposits.
handle cash.

5. Cashiers do not Other controls. All cashiers should

take vacations. either take vacations
or be rotated to other
jobs and shifts.

EXERCISE 8-3B

(a) (b)
Recommended
Procedure Weakness Principle Change
1. The approval Segregation The store manager
and payment of duties. should approve bills
of bills is done for payment and the
by the same treasurer should sign
individual. and issue checks.

2. The bank Independent Someone with no

reconciliation internal other cash
is not verification. responsibilities
independently should prepare the
prepared. bank reconciliation.

3. Antiques are Physical, Antiques should be

not stored in mechanical, stored in a locked
a secure area. and electronic storage area.
controls.

© 2008 For Instructor Use Only 8-2

EXERCISE 8-3B (Continued)

(a) (b)
Recommended
Procedure Weakness Principle Change
4. Checks are not Documentation Checks should
prenumbered. procedures. be prenumbered
and subsequently
accounted for.

5. Filing does Other controls. Bills should be

not prevent a stamped PAID after
bill from being payment.
paid more than
once.

EXERCISE 8-4B

(a) Weaknesses (b) Suggested Improvement

1. Checks are not prenumbered. Use prenumbered checks.

2. The purchasing agent signs Only the treasurer’s department

checks. personnel should sign checks.

3. Unissued checks are stored in Unissued checks should be stored

unlocked file cabinet. in a locked file cabinet with access
restricted to authorized personnel.

4. Purchasing agent approves Purchasing should approve bills for

and pays for goods purchased. payment by the treasurer.

5. After payment, the invoice is The invoice should be stamped

filed. PAID.

6. The purchasing agent records Only accounting department

payments in cash disburse- personnel should record cash
ments journal. disbursements.

© 2008 For Instructor Use Only 8-3

EXERCISE 8-4B (Continued)

(a) Weaknesses (b) Suggested Improvement

7. The treasurer records the Same as answer to No. 6 above.

checks in cash disbursements
journal.

8. The treasurer reconciles the An internal auditor should

bank statement. reconcile the bank statement.

(b) To: Treasurer, Leah Company

From: Accounting Student

I have reviewed your cash disbursements system and suggest that you
make the following improvements:

1. Leah Company should use prenumbered checks. These should

be stored in a locked file cabinet or safe with access restricted to
authorized personnel.

2. The purchasing department should approve bills for payment. The

treasurer’s department should prepare and sign the checks. The in-
voices should be stamped paid so that they cannot be paid twice.

3. Only the accounting department personnel should record cash

disbursements.

4. An internal auditor should reconcile the bank statement.

If you have any questions about implementing these suggestions, please

contact me.

© 2008 For Instructor Use Only 8-4

EXERCISE 8-5B

Procedure IC good or weak? Related internal control principle

1. Good Establishment of Responsibility
2. Weak Independent Internal Verification
3. Good Segregation of Duties
4. Weak Segregation of Duties
5. Weak Documentation Procedures

EXERCISE 8-6B

Procedure IC good or weak? Related internal control principle

1. Weak Other Controls
2. Good Establishment of Responsibility
3. Good Segregation of Duties
4. Weak Independent Internal Verification
5. Weak Physical, Mechanical, and
Electronic Controls

EXERCISE 8-7B

May 1 Petty Cash................................................................. 200.00

Cash ................................................................ 200.00

June 1 Delivery Expense.................................................... 73.30

Postage Expense.................................................... 75.50
Miscellaneous Expense........................................ 40.40
Cash ................................................................... 187.00
Cash Over and Short .................................... 2.20

July 1 Delivery Expense.................................................... 43.00

Entertainment Expense ........................................ 98.50
Miscellaneous Expense........................................ 47.00
Cash ................................................................... 188.50

July 10 Cash ............................................................................ 50.00

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

© 2008 For Instructor Use Only 8-5

EXERCISE 8-8B

Mar. 1 Petty Cash ............................................................................. 150

Cash ............................................................................... 150

15 Stamp Inventory .................................................................. 35

Freight-out............................................................................. 19
Miscellaneous Expense .................................................... 21
Travel Expense .................................................................... 20
Cash ............................................................................... 92
Cash Over and Short ................................................ 3

20 Cash ........................................................................................ 50
Petty Cash .................................................................... 50

EXERCISE 8-9B

(a) Cash balance per bank statement ....................... $4,714.60

Add: Deposits in transit ......................................... 730.00
5,444.60
Less: Outstanding checks .................................... 1,214.00
Adjusted cash balance per bank.......................... $4,230.60

Cash balance per books ......................................... $5,190.60

Less: NSF check....................................................... $930.00
Bank service charge ................................... 30.00 960.00
Adjusted cash balance per books ....................... $4,230.60

(b) Accounts Receivable .............................................. 930.00

Cash..................................................................... 930.00

Miscellaneous Expense ......................................... 30.00

Cash..................................................................... 30.00

© 2008 For Instructor Use Only 8-6

EXERCISE 8-10B

The outstanding checks are as follows:

No. Amount
255 $ 510
260 550
264 350
Total $1,410

EXERCISE 8-11B

(a) VINCE’S VIDEO COMPANY

Bank Reconciliation
July 31

Cash balance per bank statement............................................ $2,542

Add: Deposits in transit ............................................................ 525
3,067
Less: Outstanding checks......................................................... 207
Adjusted cash balance per bank .............................................. $2,860

Cash balance per books.............................................................. $2,549

Add: Collection of note receivable
($300 plus accrued interest $36,
less collection fee $15)................................................... 321
2,870
Less: Bank service charge ........................................................ 10
Adjusted cash balance per books............................................ $2,860

(b) July 31 Cash ............................................................................... 321

Miscellaneous Expense ........................................... 15
Notes Receivable .............................................. 300
Interest Revenue ............................................... 36

31 Miscellaneous Expense ........................................... 10

Cash ...................................................................... 10

© 2008 For Instructor Use Only 8-7

EXERCISE 8-12B

(a) PAT COMPANY

Bank Reconciliation
September 30

Cash balance per bank statement ............................... $ 9,525

Add: Deposits in transit ................................................. 2,581
12,106
Less: Outstanding checks ............................................ 1,382
Adjusted cash balance per bank.................................. $10,724

Cash balance per books ................................................. $10,094

Add: Collection of note receivable ($850 + $34).......... $884
Interest earned ....................................................... 26 910
11,004
Less: NSF check............................................................... 245
Safety deposit box rent...................................... 35 280
Adjusted cash balance per books ............................... $10,724

(b) Sept. 30 Cash................................................................. 884

Notes Receivable................................ 850
Interest Revenue................................. 34

30 Cash................................................................. 26
Interest Revenue................................. 26

30 Miscellaneous Expense ............................ 35

Cash........................................................ 35

30 Accounts Receivable—J. Jackson........... 245

Cash........................................................ 245

EXERCISE 8-13B

(a) Deposits in transit:

Deposits per books in July .................................. $18,940
Less: Deposits per bank in July........................ $18,200
Deposits in transit, June 30.................... (1,100)
July receipts deposited in July........................... 17,100
Deposits in transit, July 31 .................................. $ 1,840

© 2008 For Instructor Use Only 8-8

EXERCISE 8-13B (Continued)

(b) Outstanding checks:

Checks per books in July................................... $17,850
Less: Checks clearing bank in July............... $17,050
Outstanding checks, June 30 .............. (1,275)
July checks cleared in July ............................... 15,775
Outstanding checks, July 31............................. $ 2,075

(c) Deposits in transit:

Deposits per bank statement in September ....................... $24,900
Add: Deposits in transit, September 30.............................. 1,900
Total deposits to be accounted for........................................ 26,800
Less: Deposits per books........................................................ 23,950
Deposits in transit, August 31 ................................................. $ 2,850

(d) Outstanding checks:

Checks clearing bank in September...................................... $22,800
Add: Outstanding checks, September 30 .......................... 3,200
Total checks to be accounted for........................................... 26,000
Less: Cash disbursements per books................................. 22,300
Outstanding checks, August 31.............................................. $ 3,700

EXERCISE 8-14B

(a) Cash and cash equivalents should be reported at $42,400.

Cash in bank.................................................................................. $20,000
Cash on hand ................................................................................ 5,000
Petty cash....................................................................................... 400
Highly liquid investments ......................................................... 17,000
$42,400
(b) “Cash in plant expansion fund” should be reported as part of long-term
investments (a noncurrent asset). “Receivables from customers” should be
reported as accounts receivable in the current assets. “Stock investments”
should also be reported in the current assets.
(c) Pork Chop should disclose in the financial statements the details about
the compensating balances. These are generally minimum cash
balances the bank requires the borrower to maintain. They are a
restriction on the use of cash that may affect the company’s liquidity.

© 2008 For Instructor Use Only 8-9

 SOLUTIONS TO PROBLEMS

PROBLEM 8-1C

(a) Principles Application to Discount Theater

Establishment of responsibility. Only cashiers are authorized to sell

tickets. Only the manager and cashier
can handle cash.

Segregation of duties. The duties of receiving cash and admit-

ting customers are assigned to the
cashier and to the usher. The manager
maintains custody of the cash, and the
company accountant records the cash.

Documentation procedures. Tickets are prenumbered. Cash count

sheets are prepared. Deposit slips are
prepared.

Physical, mechanical, and A safe is used for the storage of cash

electronic controls. and a machine is used to issue tickets.

Independent internal verification. Cash counts are made by the manager

at the end of each cashier’s shift. Daily
comparisons are made by the company
treasurer.

Other controls. Shifts are rotated among the cashiers.

(b) Actions by the usher and cashier to misappropriate cash might include:

(1) Instead of tearing the tickets, the usher could return the tickets to
the cashier who could resell them, and the two could divide the cash.

(2) The cashier could issue a lower price ticket than paid for and the
usher would admit the customer. The difference between the ticket
issued and the cash received could be divided between the usher
and cashier.

© 2008 For Instructor Use Only 8-10

 PROBLEM 8-2C

(a) July 1 Petty Cash .......................................................... 100.00

Cash ............................................................ 100.00

15 Freight-out.......................................................... 51.00
Postage Expense ............................................. 20.50
Entertainment Expense.................................. 23.10
Miscellaneous Expense ................................. 4.10
Cash ............................................................ 96.90
Cash Over and Short ............................. 1.80

31 Freight-out.......................................................... 43.50
Charitable Contributions Expense............. 20.00
Postage Expense ............................................. 20.10
Miscellaneous Expense ................................. 12.30
Cash ............................................................ 95.90

Aug. 15 Freight-out.......................................................... 40.20

Entertainment Expense.................................. 21.00
Postage Expense ............................................. 14.00
Miscellaneous Expense ................................. 19.80
Cash Over and Short ...................................... 3.00
Cash ............................................................ 98.00

16 Petty Cash .......................................................... 50.00

Cash ............................................................ 50.00

31 Freight-out.......................................................... 74.00
Entertainment Expense.................................. 43.20
Freight-out.......................................................... 17.70
Cash Over and Short ...................................... 2.10
Cash ............................................................ 137.00

(b)

Petty Cash
Date Explanation Ref. Debit Credit Balance
July 1 CP 100 100
Aug. 16 CP 50 150

© 2008 For Instructor Use Only 8-11

PROBLEM 8-2C (Continued)

(c) The internal control features of a petty cash fund include:

(1) A custodian is responsible for the fund.

(2) A prenumbered petty cash receipt signed by the custodian and the
individual receiving payment is required for each payment from
the fund.

(3) The treasurer’s office examines all payments and stamps supporting
documents to indicate they were paid when the fund is replenished.

(4) Surprise counts can be made at any time to determine whether the
fund is intact.

© 2008 For Instructor Use Only 8-12

 PROBLEM 8-3C

(a) WOLVERINE GENETICS COMPANY

Bank Reconciliation
May 31, 2008

Cash balance per bank statement........................... $13,332

Add: Deposit in transit ............................................. $2,100
Bank error—Carr check................................. 900 3,000
16,332
Less: Outstanding checks........................................ 1,225
Adjusted cash balance per bank ............................. $15,107

Cash balance per books............................................. $13,287

Add: Collection of note receivable
($4,000 note plus $80 interest
less $25 fee) ...................................................... 4,055
17,342
Less: NSF check .......................................................... $1,308
Error in May 12 deposit ................................. 100
Error in recording check No. 1181 ............. 792*
Check printing charge.................................... 35 2,235
Adjusted cash balance per books........................... $15,107

*$911 – $119

(b) May 31 Cash ............................................................................ 4,055

Miscellaneous Expense........................................ 25
Notes Receivable .......................................... 4,000
Interest Revenue ........................................... 80

31 Accounts Receivable—Bo Slembech .............. 1,308

Cash .................................................................. 1,308

31 Sales ........................................................................... 100

Cash .................................................................. 100
31 Accounts Payable—G. Fischer .......................... 792
Cash .................................................................. 792

31 Miscellaneous Expense........................................ 35
Cash .................................................................. 35
© 2008 For Instructor Use Only 8-13
 PROBLEM 8-4C

(a) CHAPIN COMPANY

Bank Reconciliation
November 30, 2008

Balance per bank statement................................ $ 9,100

Add: Deposits in transit...................................... 1,541
10,641
Less: Outstanding checks
No. 2451 .................................................... $700
No. 2472 .................................................... 270
No. 2478 .................................................... 300
No. 2482 .................................................... 350
No. 2484 .................................................... 460
No. 2485 .................................................... 525
No. 2487 .................................................... 210
No. 2488 .................................................... 635 3,450
Adjusted cash balance per bank........................ $ 7,191

Balance per books .................................................. $ 5,958

Add: Note collected by bank
($1,300 note plus $91 interest
less $16 fee)................................................. 1,375
7,333
Less: Check printing charge .............................. $ 34
Error in recording check No. 2479.......... 90*
Error in 11-21 deposit
($1,642 – $1,624)...................................... 18 142
Adjusted cash balance per books ..................... $ 7,191

*$980 – $890

© 2008 For Instructor Use Only 8-14

PROBLEM 8-4C (Continued)

(b) Nov. 30 Cash...................................................................... 1,375

Miscellaneous Expense ................................. 16
Notes Receivable..................................... 1,300
Interest Revenue...................................... 91

30 Miscellaneous Expense ................................. 34

Cash............................................................. 34

30 Accounts Payable ............................................ 90

Cash............................................................. 90

30 Accounts Receivable ...................................... 18

Cash............................................................. 18

© 2008 For Instructor Use Only 8-15

 PROBLEM 8-5C

(a) BUMMER COMPANY

Bank Reconciliation
August 31, 2008

Cash balance per bank statement ............................ $16,856

Add: Deposits in transit (1) ...................................... $ 5,129
Bank error ($277 – $275)................................. 2 5,131
21,987
Less: Outstanding checks (2)................................... 4,156
Adjusted cash balance per bank............................... $17,831

Cash balance per books .............................................. $13,215

Add: Collection of note receivable by bank
($4,400 note plus $105 interest)................... $ 4,505
Book error ($430 – $340)................................. 90
Interest earned ................................................... 41 4,636
17,851
Less: Safety deposit box rent................................... 20
Adjusted cash balance per books ............................ $17,831

(1) August receipts per books................................. $50,050

August deposits per bank .................................. $47,521
Less: Deposits in transit, July 31 ................... 2,600 44,921
Deposits in transit, August 31 .......................... $ 5,129

(2) Disbursements per books in

August ............................................. $47,794
Less: Book error.............................. 90
Total disbursements to be
accounted for................................ 47,704
Checks clearing bank in
August ............................................. $46,475
Less: Bank error.............................. $ 2
July 31 outstanding
checks ................................ 2,925 2,927 43,548
Outstanding checks,
August 31 ....................................... $ 4,156

© 2008 For Instructor Use Only 8-16

PROBLEM 8-5C (Continued)

(b) Aug. 31 Cash.......................................................................... 4,505

Notes Receivable......................................... 4,400
Interest Revenue.......................................... 105

31 Cash.......................................................................... 41
Interest Revenue.......................................... 41

31 Miscellaneous Expense ..................................... 20

Cash................................................................. 20

31 Cash.......................................................................... 90
Accounts Payable ....................................... 90

© 2008 For Instructor Use Only 8-17

 PROBLEM 8-6C

(a) GAZARRA COMPANY

Bank Reconciliation
October 31, 2008

Balance per bank statement....................................................... $15,453.00

Plus: Undeposited receipts....................................................... 3,226.18
18,679.18
Less: Outstanding checks

No. Amount No. Amount

62 $107.74 862 $162.10
183 127.50 863 192.78
284 215.26 864 140.49 ......................... 945.87

Adjusted balance per bank ......................................................... $17,733.31

Cash balance per books .............................................................. $18,608.81

Add: Bank credit (collection of note receivable)............... 340.00
Adjusted balance per books (before theft)............................ 18,948.81
Theft.................................................................................................... 1,215.50*
Adjusted balance per books....................................................... $17,733.31

*$18,948.81 – $17,733.31

(b) The cashier attempted to cover the theft of $1,215.56 by:

1. Not listing as outstanding three checks totaling $450.50 (No. 62,

$107.74; No. 183, $127.50; and No. 284, $215.26).

2. Underfooting the outstanding checks listed by $85.06 (The correct

total is $495.37.)

3. Subtracting the $340 bank credit from the book balance instead of
adding it to the book balance, thereby concealing $680 of the theft.

© 2008 For Instructor Use Only 8-18

PROBLEM 8-6C (Continued)

(c) 1. The principle of independent internal verification has been violated

because the cashier prepared the bank reconciliation.

2. The principle of segregation of duties has been violated because

the cashier had access to the accounting records and also prepared
the bank reconciliation.

© 2008 For Instructor Use Only 8-19