Chapter 1 - siast5€¦ · Web view17 Printing Expense 75.00 Taxi Expense 48.00 Delivery Expense...

Chapter 9 Internal 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, bond

employees, separate recordkeeping and custody, establish separation of duties, apply technological 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 collusion necessary 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 no longer control the business through personal supervision and direct participation in its affairs.

5. Responsibility for a sequence of related transactions should be divided so that the work of 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 the amount of cash received and helps prevent an employee from having personal use of the 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. Having department managers place orders through a purchasing department helps control the amounts purchased and the resulting liabilities.

8. A petty cash receipt is a document stating that a payment has been made from petty cash. 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 Limited. All rights reserved.Solutions Manual for Chapter 9 799

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 with managerial policies that protect the assets from waste, fraud, and theft. The system 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 to reduce fraud. If this fundamental principle is followed, there has to be collusion between two or more employees for assets to be stolen and the theft to be concealed in the records.

c. Your supervisor’s lack of concern is suspicious. The supervisor had control over both the custody and recording of bus passes; this lack of separation of duties represents poor internal controls. You have identified 1,251 (9,820 – 9,750 = 71; 11,750 – 11,012 = 739; 22,440 – 22,000 = 441) missing bus passes at $50 each for a total value of $62,550. You have an obligation to report this irregularity to both your work experience advisor at the college and your supervisor’s superior since your supervisor is not willing to deal appropriately with 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 that receipts be deposited intact daily, and (3) require that all disbursements are made by cheque.

b. The organization may be small and the separation of duties may be difficult. However, wherever possible, tasks should be segregated. Also, periodic checks should be made by an independent party to ensure procedures are being followed. Members could deposit their collections directly (no withdrawal privileges) and report the details to the recordkeeper. Restrictions could be placed on the bank account such that withdrawals can be made only via a cheque requiring two signatures to

Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.800 Fundamental Accounting Principles, Twelfth Canadian Edition

ensure cheques are being written for authorized expenditures only.


Quick Study 9-31.

May 1 Petty Cash................................... 75.00 Cash.................................. 75.00 To record establishment of fund.

2.Wee Ones Agency

Petty Cash Payments ReportMay 1 – 31, 2011

Receipts:Entertainment expense

Film rentals..............................$19.40

Refreshments for meeting.........22.81

$42.21

Postage expense...................... 6.95Printing expense....................... 13.1

0Total receipts................................................. $62.26Fund total..................................... $75.

00Less: Cash remaining.................... 12.7

4Equals: Cash required to replenish petty cash......................

62.26

Cash over/(short).......................... $ -0-

May 31

Entertainment Expense................ 42.21

Postage Expense......................... 6.95Printing Expense......................... 13.10 Cash.................................. 62.26 To 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 9-4Mar. 1

7Printing Expense......................... 75.00

Taxi Expense............................... 48.00Delivery Expense......................... 55.00Cash Over and Short.................... 3.00 Cash.................................. 181.00 To reimburse the fund.


Quick Study 9-5

Sept. 23

Entertainment Expense................ 32.00

Computer Repair Expense............ 45.00Delivery Expense......................... 18.00 Cash Over and Short........... 2.00 Cash.................................. 93.00 To reimburse the fund.

Quick Study 9-6Feb. 1 Cash........................................... 73,125

Credit Card Expense.................... 1,875Sales...................................... 75,000

To 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...................................... 28,000

To record sale of merchandise to cash customers.




Quick Study 9-7Oct. 1 Cash........................................... 13,965

Debit Card Expense..................... 35Sales...................................... 14,000

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



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; subtract —f. Book; subtract JE requiredg. Book; subtract JE required


Quick Study 9-9BOLTON COMPANYBank ReconciliationOctober 31, 2011

Bank statement balance $15,400

Book balance........ $13,150

Add: Outstanding deposit. 1,2

00$16,600

Deduct: Outstanding cheques: #150: $ 980 #169: 2,515....... 3,49

5

Deduct: Service charge.. . 45

Adjusted bank balance. $13,

105Adjusted book balance................

$13,105

Oct. 31

Service Charge Expense........... 45

Cash................................... 45 To record bank service charge.

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

RatioCompany B’s Acid-test

Ratio1,200 + 2,700 = 1.16 1,200 + 2,700 = 0.68 3,100 + 250 4,750 + 950

Company A would be granted credit because the acid-test ratio is greater than 1.

Company B would not be granted credit because the acid-test ratio is less than 1 indicating possible liquidity problems.


EXERCISES

Exercise 9-1 (10 minutes)Lombard Company’s internal control system failed to require a separation of asset custody and recordkeeping. The bookkeeper should not have been allowed to sign the company’s cheques. In addition, since a loss was incurred, the company apparently had not bonded its employee. Otherwise, the loss would have been insured by the bonding company. Finally, if regular, independent reviews of the accounting records had been done, the payments of salary cheques to a nonemployee may have been discovered sooner.

Exercise 9-2 (15 minutes)You have several concerns. First, there is no mechanism in the parking meters to track the input of coins (a meter reading that could be documented and subsequently verified against the collection); this means there is no verifiable means by which to reconcile the contents of each meter. Second, because of the first shortcoming, the employee emptying the contents of the meters could withhold some of the coins since the dollar value cannot be verified. Third, the canvas bag is not secure; it can be opened at any time by an unauthorized individual. Fourth, after emptying several parking meters, the contents of each canvas bag can easily exceed a thousand dollars; there is a safety risk 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 meters seems unlikely, therefore, civic employees collecting coins from parking meters should 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 to collect the coins is also problematic. It should be redesigned so that coins can go in but cannot be removed unless done so by an authorized individual. Finally, for safety of the individuals involved and for security over the coins, full moneybags should not be stored in an unattended vehicle. Full moneybags should be transferred to a secure location immediately; arrangements could be made with an armored vehicle to rendezvous with the pair of employees regularly at specified points along the route. Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 9 807

Exercise 9-3 (15 minutes)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 should sign a receipt for the merchandise and the amount of cash that he or she has been given. At the end of each day, the employee should be required to return cash plus remaining 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 given each weekend. Then, each time the employee makes a purchase, he or she should obtain a signed sales receipt for the payment. The sales receipt should list the items purchased and the prices paid. When the employee returns to the business office, the total value of the signed sales receipts plus any remaining cash should equal the amount of cash originally given to the employee. Also, the merchandise brought back by the employee should be the same as the items listed on the signed sales receipts.

Exercise 9-4 (15 minutes)The internal control problem is that the bookkeeper has physical control over the cash receipts and also has control over the accounting records. Nothing in the system prevents the bookkeeper from taking cash from the mail and using it personally. The bookkeeper might delay recording the cash receipt from a customer until more cash comes in at a later date from a second customer. Then, the new cash receipt would be deposited and recorded as a payment made by the first customer. No entry would be made 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 and claim that a payment was never received and apparently lost in the mail.

If only one person is present when the mail is opened, that person may steal cash and claim it was never received. If possible, two people should be present. Otherwise, the honesty and integrity of the person chosen to open the mail is critical. Most importantly, the bookkeeper should not have physical control over cash.


Exercise 9-5 (20 minutes)Part 1a.Jan. 1 Petty Cash..................................200.00

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

b.Eanes Co.

Petty Cash Payments ReportJanuary 1 – 8, 2011

Receipts:Postage expense...................... $64.

00Merchandise inventory.............. 19.0

0Store supplies.......................... 36.5

0Jim Eanes, Withdrawals............. 53.

00Total receipts................................................. $172.50Fund total..................................... $200

.00Less: Cash remaining.................... 27.


172. 50

Cash over/(short).......................... $ -0-

Jan. 8 Postage Expense......................... 64.00Merchandise Inventory................ 19.00Store Supplies Expense*.............. 36.50Jim Eanes, Withdrawals................ 53.00

Cash....................................... 172.50To reimburse the fund.

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

Merchandise Inventory................ 19.00Store Supplies Expense*.............. 36.50Jim Eanes, Withdrawals................ 53.00Petty Cash..................................300.00

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


Analysis ComponentIf the January 8 entry to reimburse the fund was not recorded, net income would be overstated.

* Either Store Supplies Expense (an expense) or Store Supplies (an asset) could be debited. However, if supplies are being purchased through Petty Cash it is likely that they are for immediate use which justifies using an expense account over an asset.


Exercise 9-6 (20 minutes)a.Sept.9 Petty Cash..................................400.00

Cash....................................... 400.00To establish the fund.

b.Brady Company

Petty Cash Payments ReportSeptember 9 – 30, 2011

Receipts:Merchandise inventory............. $

32.45

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

Repairs expense....................... 87. 60

Total receipts............................... $233.60)

Fund total.................................... $400.00

Less: Cash remaining................... 146. 40

Equals: Cash required to replenish petty cash....................................

253. 60)

Cash over/(short).......................... ($ 20.00)

Sept.30 Merchandise Inventory................ 32.45Office Supplies Expense*..............113.55Repairs Expense.......................... 87.60Cash Over and Short.................... 20.00

Petty Cash.............................. 100.00Cash....................................... 153.60

To reimburse the fund and decrease it by $100.

Analysis component:There are several things that could be done. The Marketing Manager should review the prior month’s petty cash journal entries to determine if the shortage is an anomaly or a recurring event. Hopefully it is an anomaly but, regardless, the manager will need to question the Petty Cash Custodian about the $20 cash shortage recorded in September. It is Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 9 811

important to recognize that honest errors do occur. It is also possible that the Petty Cash Custodian requires training to help him manage the petty cash fund. If it is determined that the error was based on dishonesty, appropriate action will have to be taken (which normally results in the dismissal of the employee as a minimum).

* 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 that they are for immediate use which justifies using an expense account over an asset.


Exercise 9-7 (20 minutes)a. Oct. 31........................Cleaning Expense 120.00

Postage Expense.......................... 79.00Delivery Expense.......................... 60.00 Cash Over and Short............ 4.00 Cash................................... 255.00

To reimburse the fund.

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

Entertainment Expense................. 156.00Cash Over and Short..................... 2.00 Cash.................................... 233.00

To reimburse the fund.

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

Office Supplies Expense*............... 140.00Entertainment Expense................. 62.00Petty Cash.................................... 100.00 Cash.................................... 382.00

To reimburse and increase the fund.



Exercise 9-8 (20 minutes)Oct. 1 Cash........................................... 104,475

Debit Card Expense..................... 525Service Revenue.....................

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

7 Cash........................................... 37,000Service Revenue..................... 37,000

To record sale of services provided for cash.

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

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

10 Accounts Receivable – Edson CHC. 84,000Service Revenue..................... 84,000

To record sale of services.

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

Accounts Receivable – Edson CHC84,000

To 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 Accounts Receivable.................... 15,800Sales...................................... 15,800

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



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

Sales......................................114,000

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



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

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




Exercise 9-9 (concluded)

Analysis componentCash sales would be preferable, however, often it is not convenient for customers. The inconvenience of cash might prevent customers from making purchases if that was the only means of payment accepted by LenCon. Credit sales allow customers to purchase on impulse. However, two disadvantages: receipt of cash by LenCon is delayed and credit sales require administrative time to monitor the timely collection from credit customers. Debit cards have the advantage of allowing customers to make impulse purchases but only if the cash balance is available in their bank account. Debit cards are also comparable to cash (no subsequent collection required) but the bank does charge a fee for this service although it is normally significantly less than the fee charged by banks for credit card transactions. Bank credit cards have the advantages of cash being collected by LenCon immediately (positive effect on cash flow) and customers are limited only to their credit card limit (not their bank account balance); customers are buying on credit but the risk of collection is transferred to the credit card company. The disadvantage of credit cards is the fee charged by the administering bank. LenCon will likely accept all forms of payment to enhance sales and in so doing recognize the costs and risks of each.


Exercise 9-10 (25 minutes)1.

PELZER HOLDINGSBank Reconciliation

July 31, 2011

Bank statement balance $9,848

Book balance........ $9,740

Add: Outstanding deposit. Bank error (Peltza cheque).......................

572 56

0$10,980

Deduct: Outstanding cheques: #14: $ 600 #54: 140......... 1,4

80

Deduct: NSF — Jim Anderson..............

240

Adjusted bank balance. $9,5

00Adjusted book balance................

$9,500

2.July 31

Accounts Receivable – Jim Anderson.................................

240

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

Analysis componentIf the journal entry in (2) is not recorded, net income, liabilities, and owner’s equity would not be affected. Assets would be increased and decreased by the same amount causing a net change of zero.

Exercise 9-11 (25 minutes)

MEDLINE SERVICE CO.Bank Reconciliation

July 31, 2011Bank statement balance $10,332Book balance of cash..........................$11,352Add:......................... Add:


Deposit of July 31.. 2,724 Error on Ch. No. 919..................... 9

$13,056 $11,361Deduct:..................... Deduct:

Outstanding cheques 1,713.................. Bank service charge........... 18Adjusted bank balance $11,343Adjusted book balance.....................$11,343

Exercise 9-11 (concluded)

b.July31 Cash........................................... 9

Utilities Expense..................... 9To correct error.

31 Bank Service 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’s equity would each be overstated by a net amount of $9 ($18 - $9 = $9); liabilities are not affected by the entries in (a).


Exercise 9-12 (20 minutes)Not Shown

Bank Balance Book Balance on the

MustReconcil-

AddDeductAddDeductAdjustiation 1. Interest earned on the account. x

Dr. 2. Deposit made on September 30

after the bank was closed.x

3. Cheques outstanding on August 31 that cleared the bank in September. x

4. NSF cheque from customer returned on September 15 but not recorded by the company. x Cr.

5. Cheques written and mailed to payees on September 30. x

6. Deposit made on September 5 that was processed on September 8. x

7. Bank service charge. xCr.

8. Cheques written and mailed to payees on October 5. x

9. Cheque written by another depositor but charged against the company's account. x

10. Principal and interest collected by the bank but not recorded by the company. x Dr.


11. Special charge for collection of note in No. 10 on company's behalf. x Cr.

12. Cheque written against the account and cleared by the bank; erroneously omitted by the bookkeeper. x Cr.


*Exercise 9-13 (15 minutes)Case

XCase Y Case Z

Cash............................. $ 800

$ 910 $1,100

Short-term investments -0- -0- 500Accounts receivable...... -0- 990 800 Quick assets................. $

800$1,900 $2,400

Current liabilities.......... $2,200

$1,100 $3,650

Acid-test ratio.............. 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 of 1.73 exceeds the common benchmark of 1.0. Cases X and Z fall short of the 1.0 benchmark.


PROBLEMS

Problem 9-1A (20 minutes)1. Violates the principle of establishing responsibility. Only Jill

should have access to the petty cash fund since she is the custodian. The company should implement a policy of not allowing petty cash transactions over the lunch hour.

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

3. Violates regular and independent review. Jack Mawben needs to implement a way to regularly and independently review his employees. Hiring of internal auditors or an outside consultant to objectively review the internal controls and employee’s work 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 on the property insurance. However, we can say that dropping the insurance for bonding the employees weakens internal control. If the company does need to engage in cost cutting they should do it without compromising their internal controls. The insurance for the bonding of key employees should be reinstated.

5. Violates separation of duties. The company should implement a policy whereby the person recording incoming cash receipts is not responsible for posting the payment to the customer accounts.


Problem 9-2A (30 minutes) Part 1Feb. 2 Petty Cash............................... 350

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

Part 2PALLADIUM ART GALLERY

Petty Cash Payments ReportFebruary 2 – 28, 2011

Receipts:Delivery expense

Feb. 23 Delivery of customer’s merchandise...........

$18.00

Auto expenseFeb. 14 Reimbursement for business auto expense.............. 100.

00Postage expense

Feb. 12 Express delivery of contract...................................

$ 9.95

28 Purchased stamps....... 64. 00

73.95

Transportation-in (Merchandise Inventory)

Feb. 9 COD charges on purchased merchandise..............

$22.50

25 COD charges on purchased merchandise.............

15. 10

37.60

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

$10.13

20 Purchased stationery................................

77. 76

87.89

Total receipts................................................. $317.44Fund total..................................... $350

.00Less: Cash remaining.................... 29.


320.77

Cash over/(short).......................... ($ 3.33)


Problem 9-2A (concluded) Part 3Feb.28 Delivery Expense...................... 18.00

Auto Expense........................... 100.00Postage Expense...................... 73.95Merchandise Inventory............. 37.60Office Supplies Expense*.......... 87.89Cash Over and Short................ 3.33Petty Cash............................... 50.00

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

Analysis componentThis is a sensitive situation. Receipts are integral to authenticating accounting transactions (objectivity principle). You should first question the person involved to give 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 concerns with the gallery owner citing the manager’s response to your question. It is then the owner’s responsibility 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.



Problem 9-3A (20 minutes)Apr. 1 Petty Cash............................... 250.00

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

15 Advertising Expense................. 57.15Janitorial Expense.................... 78.00Postage Expense...................... 43.50Office Supplies 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...................... 39.75Auto Expense........................... 28.50Office Supplies Expense*.......... 48.36

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

To reimburse fund and decrease it by $50.

Analysis componentIf 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 assets would be overstated by $116.61.

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



Problem 9-4A (30 minutes)a.

DARTMOUTH COMPANYBank Reconciliation

June 30, 2011

Bank statement balance.....................

$ 8,379.

34

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

Add: Add: Deposit of June 29... 2,220

.85 Error, cheque no. 887...............

1,000.00

10,600.19

Error, cheque no. 891...............

100. 00

Deduct: $6,041.69

Outstanding cheques: No. 888. 1,186.3

0Deduct:

No. 890. 1,146.40

Bank service charges..............

45. 70

No. 892. 1,106.70

No. 893. 1,164.80

4,604 .20

Adjusted bank balance.....................

$ 5,995.

99

Adjusted book balance..............

$5,995.99

b.June 30 Cash............................................ 1,000.00

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

30 Cash............................................ 100.00Utilities Expense...................... 100.00

To account for error in Cheque #891.

30 Bank Service Charge Expense........ 45.70Cash........................................ 45.70

To record bank service charges for June.


Analysis component:Because your position does not represent good internal controls (writing and recording of cheques should be segregated, if possible, from the preparation of the bank reconciliation), there is the potential for fraud. You should review the journal entry regarding cheque #882 to determine who the payee is. This information, along with the fact that the June bank statement had been mailed to the former employee’s home, should be brought to the supervisor’s attention. Prior bank reconciliations should be reviewed to determine if this is a recurring situation. If conflicting duties cannot be segregated in future, the bank reconciliations should be reviewed regularly by a supervisor/owner of the business.

Problem 9-5A (30 minutes)a)

HOLLIDAY ADVENTURESBank Reconciliation

April 30, 2011


$46,904

Book balance. . $42,916

Add: Interest revenue.................$94 Error Chq #93............... 198

2 92

$43,208

Deduct:

9,44 0

Deduct: Outstanding cheques:

NSF................$824

#79....... $5,200 Payment.........4,200

#91....... 800 Interest Expense............

640

#96....... 640 Service Charge..............

80

5,7 44

#100..... 2,800 Adjusted bank balance.....................

$37,464

Adjusted book balance..................

$37,464


b)Apr. 30 Cash............................................ 94

Interest Revenue...................... 94To record interest earned.

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

To account for error in Cheque #93.

30 Accounts Receivable – Jon Smith.... 824Cash........................................ 824

To reinstate customer account.

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

To record April loan payment.

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

To record April interest expense.

30 Bank Service Charges Expense...... 80Cash........................................ 80

To record April bank charges.

Problem 9-6A (30 minutes) Part 1DEWEERD COMPANYBank ReconciliationOctober 31, 2011


$56,040

Book balance of cash......................

$52,796

Add: Add: Deposit of October 31.............................

20,3 04

Proceeds of note less

$76,344

collection charge ($18,000 – $90).... 17

,910$70,706

Deduct: Deduct: Cheques No. 3031

$2,760

NSF cheque and fee —

3065. 672 Jefferson Tyler.............$1,610


3069. 4,2 96

7,7 28

Service charge....................30 Error recording Cheque No. 3056..... 450

2 ,090

Adjusted bank balance $68,616


$68,616

Part 2

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

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

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

To record NSF cheque.

31 Bank Service Charges Expense........ 30Cash.......................................... 30


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

To correct error.


Problem 9-6A (concluded)

Analysis componenta. If the company’s Cash account balance of $52,796 is listed

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

b. The bank’s collection of a $18,000 note less the $90 collection fee should have been added to the book balance of cash. Instead, it was added to the bank statement 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 that results 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 a doubling effect.


Problem 9-7A (50 minutes) Part 1

MORGAN COMPANYBank ReconciliationSeptember 30, 2011

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

Deposit of September 30 3,165.50............... Interest earned..................... 45.00

Proceeds of note less$39,892.60 collection 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 1,236.50Adjusted bank balance$36,653.50 Adjusted book balance

$36,653.50

Part 2Sept.30 Cash........................................ 45.00

Interest Revenue................. 45.00To record interest earned.

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

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

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


30 Computer Equipment................ 60.00Cash................................... 60.00

To correct error.


Problem 9-7A (concluded)Analysis componentThere are several possible reasons why the cancelled cheques returned with a bank statement may not be numbered sequentially. Common reasons for this include the following: — 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 previous period.

— 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 the bank.

— The issuer of the cheques may have voided one or more of the cheques in the numbered sequence, perhaps because of making an error in writing the cheques.

— Occasionally, a cheque will reach the bank but the bank will incorrectly charge the cheque to the wrong account. When the bank detects the error, it will return the cheque separately with a note of explanation.


OZZIE MININGBank Reconciliation

April 30, 2011

Bank statement balance$52,6

60 Book balance.........$50,12

0Add:

Deposit of April 30 in transit.........................

26,000

Add: Owner Investment

50,00 0

Error (Chq #28: 16,400 – 10,400)..........

6,0 00

$100,120

$84,660

Deduct: Deduct:

Outstanding cheques:NSF — Don James$8,000

#14.....$3,200 Service charge. 240

#22..... 6,400Interest expense1,000

#25..... 2,000Payment..........20,000

29,24 0

#27..... 1,300


#30..... 200

#32..... 680 13,7

80

Adjusted bank balance.$70,8

80 Adjusted book balance$70,88

0


Problem 9-8A (concluded)b)

Apr. 30 Accounts Receivable – Don James.... 8,000Cash......................................... 8,000


30 Bank Service 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.



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$116,37

9.20$100,756

.44Deduct:

Outstanding cheques:

#1224. $3,270.58#1230. 4,936.60#1232. 7,250.30#1233. 964.34

16,42 1.82

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

799. 06

Adjusted bank balance $99,957.38

Adjusted book balance.................

$99,957.38

* Oct 31 adjusted balance of

$Add: November receipts 347,047.8

2Less: November disbursementsNovember 30 unadjusted balance

$

b)Nov. 30 Bank Service Charges Expense.. 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.


Problem 9-10A (30 minutes)Part 1

DUNDEE REALTYBank ReconciliationOctober 31, 2011


$48,260

Book balance.............. $38,535

Add: Deposit of October

31 in transit........... 2,300

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

Less: Collection Fee45

Interest Revenue. 350 5,3

95

Error........................ 1,70 0

$52,260

43,930

Deduct:Outstanding

cheques:#2033......$3,200#2099...... 850#2300......1,800#2345...... 5,400

11,25 0

Deduct:Service charge..... $

220Error (18,500 –

15,800).................2,700

2,9 20




Problem 9-10A (concluded)

Part 2Oct.

31Bank Service Charges Expense.... 220

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

charges.

31 Accounts Receivable – Teresa Krant.........................................

2,700

Cash...................................... 2,700

To correct error.

31 Cash.......................................... 90Accounts Payable – Decker

Company...................................90

To correct error.

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

Note Receivable..................... 5,000

Interest Revenue................... 350To record collection of note

plus interest earned less collection expense.

Analysis componentIf the entries in Part 2 are not recorded, net income and owner’s equity would 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 liabilities would be understated by $90.


ALTERNATE PROBLEMSProblem 9-1B (20 minutes)1. Violates segregation of duties. It is a good internal control

to segregate duties for cash receipts and cash disbursements. 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 supervision which is a good internal control.

2. Violates applying technological controls and segregation of duties. It is safe to assume that Stan Spencer has knowledge of employee passwords since he implemented the system of password protection company wide. It is a potentially dangerous situation that Stan 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 Stan will not have the knowledge that he currently possesses.

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

4. 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.

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


Problem 9-2B (30 minutes) Part 1

July 5 Petty Cash............................... 500.00Cash................................... 500.00

To establish the fund.Part 2

DODGE & SONSPetty Cash Payments Report

July 5 – 31, 2011Receipts:

Delivery expenseJuly 11 Delivery of customer’s merchandise.............................

$ 8.75

Auto expenseJuly 30 Reimbursement for auto expense............................

158.80

Postage expenseJuly 28 Purchased stamps......... 16.00

Transportation-in (Merchandise Inventory)

July 6 COD charges on purchased merchandise.................

$114.50

27 COD charges on purchased merchandise.................

47.1 0

161.60

Office suppliesJuly 12 Purchased file folders.... $12.1

3 14 Reimbursement for office supplies...........................

9.65

18 Purchased paper........... 22.5 4

44.32

Total receipts................................................. $389.47Fund total......................................... $500.

00Less: Cash remaining........................ 60.

53Equals: Cash required to replenish petty cash.........................................

439.4 7

Cash over/(short).............................. $ 50.00

Part 3July31 Delivery Expense...................... 8.75


Auto Expense........................... 158.80Postage Expense...................... 16.00Merchandise Inventory............. 161.60Office Supplies Expense*.......... 44.32Petty Cash............................... 50.00Cash Over and Short................ 50.00

Cash................................... 489.47To reimburse fund and increase it by $50.


Problem 9-2B (concluded)Analysis component:The balance in the Cash Over/Short Expense account for the seven months ended July 31, 2011 of $350 does appear to be unusual given that Petty Cash had a $500 balance at the beginning of July. The $350 represents an average shortage of $50 per month which reflects the actual experience for July. Two things appear unusual about the $350 balance: 1. it is large given the size of petty cash, and 2. the average is exactly the July experience. I would be concerned that the petty cashier might be defrauding the fund of money or making serious errors; either way, the situation requires further investigation and an appropriate resolution.



Problem 9-3B (20 minutes) Part 1Feb. 3 Petty Cash.................................. 150.00

Cash....................................... 150.00To establish fund.

14 Postage Expenses........................ 14.82Repairs Expense, Computer......... 36.57Merchandise Inventory................ 17.60Office Supplies Expense*.............. 16.29Cash Over and Short.................... 2.44Petty Cash.................................. 25.00

Cash....................................... 112.72To reimburse fund and increase it by $25.

28 Advertising Expense.................... 40.00Delivery Expense......................... 58.00Office Supplies Expense*.............. 28.19Petty Cash.................................. 75.00

Cash....................................... 201.19To reimburse fund and increase it by $75.

Analysis componentIf the February 28 reimbursement is not made and no entry is recorded, the expenses would not be recognized and net income and owner’s equity would be overstated by $126.19 ($40.00 + $58.00 + $28.19). Similarly, the petty cash asset and total assets would be overstated by $126.19.

Even though the February 28 entry shows a debit to Office Supplies instead of Office Supplies Expense, the expense would turn out to be understated without this entry. This result occurs because the expense equals the difference between the unadjusted Office Supplies account balance and the count of office supplies on hand at the end of the year. If the unadjusted Office Supplies account is understated, then the amount of office supplies expense will be understated.

* Either Store Supplies Expense (an expense) or Store Supplies (an asset) could be debited. However, if supplies are being purchased through Petty Cash it is likely that they are for immediate use which justifies using an expense account over an asset.


Problem 9-4B (30 minutes)a.

BURNABY COMPANYBank ReconciliationNovember 30, 2011


$ 6,703.

54

Book balance...... $4,833.26

Add: Deposit of Nov. 29. . 1,77

6.58$

8,480.12

Deduct: Outstanding cheques: No. 548. $949.04 Deduct: No. 550. 917.12 Bank service

charges.............. 36.

50 No. 552. 885.36 No. 553. 931.84

3,68 3.36


$ 4,796.

76

Adjusted book balance..............

$4,796.76

b.Nov. 30

Bank Service Charges Expense...... 36.50

Cash........................................ 36.50To record November bank

charges.

Analysis component:Because your position does not represent good internal controls (writing and recording of cheques should be segregated, if possible, from the preparation of the bank reconciliation), there is the potential for fraud. You should review the journal entry regarding cheque #543 to verify whether the payee is a legitimate supplier. This information should be brought to the supervisor’s attention. If the payee was not legitimate, prior bank reconciliations should be Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.844 Fundamental Accounting Principles, Twelfth Canadian Edition

reviewed to determine if this was a recurring situation. If conflicting duties cannot be segregated in future, the bank reconciliations should be reviewed regularly by a supervisor/owner of the business.


Problem 9-5B (30 minutes)a)

ARBOUR GLEN APARTMENTSBank Reconciliation

June 30, 2011Bank statement balance........................

$35,070

Book balance.......... $31,800

Add: Deposit of June 30 in transit..........................

7,10 0

Add: Error (A/R)........... 6,300

$42,170

$38,100

Deduct: Outstanding cheques:

Deduct: Service charge..... 200

#120...... #127...... #131...... #132...... #135......

$ 5201,700

2251,175 650 4,27

0 Adjusted bank balance..$37,90

0Adjusted book balance..................

$37,900

b)Jun. 30

Bank Service Charges Expense...... 200

Cash........................................ 200To record June bank charges.

Cash............................................. 6,300

Accounts Receivable – Darla Smith...........................................

6,300

To correct error.


Problem 9-6B (30 minutes) Part 1

BOHANNON CO.Bank ReconciliationDecember 31, 2011


$45,091.80

Book balance of cash.......................

$31,743.70Add: Add:

Deposit of December 31.............................

7,666.10

Error recording Cheque No. 1267............ 18.00 Proceeds of note less collection charge....................

19,980 .00$52,757

.90$51,741

,70Deduct: Deduct: Cheques No. $

370.50 NSF — Tork

1,084.20

Ind....................$749.50 390

.00 1,844

.70 Printing charge......... 79.00

828 .50Adjusted bank balance $50,913

.20Adjusted book balance...................

$50,913.20

Part 2Dec.31 Cash............................................ 18.00

Office Supplies......................... 18.00To correct error.

31 Cash............................................19,980.00Collection Expense........................ 20.00

Notes Receivable..................... 20,000.00To record collection of note less collection fee.

31 Accounts Receivable — Tork Industries 749.50Cash........................................ 749.50


31 Office Supplies Expense................ 79.00Cash........................................ 79.00

To record cheque printing charge.

Analysis componentIn a banking context, a debit memo is a notification from the bank that they have debited the depositor's account. Since the depositor’s account is a liability of the bank (a credit balance account), the debit notification means they have reduced the depositor’s account balance. Conversely, a credit


memo is a notification that the depositor’s account has been credited, which means increased in this context.Problem 9-7B (50 minutes) Part 1

SAFETY SYSTEMSBank Reconciliation

May 31, 2011Bank statement balance.....................

$21,808.60

Book balance of cash... . $15,270.20

Add: Add: Deposit of May 31... 2,52

6.30 Proceeds of note …….$7,300.00

$24,334.90

Less: Collection charge........................... 100.00

7,20 0.00

$22,470.20

Deduct: Deduct: Cheques No. 1780

$1,325.90

NSF — Gertie Mayer...............$431.80

1786

353.10

$ 2,318.5

0

Service charge. . 12.00

45 3.80

1789

639 .50

Error recording Cheque No. 1788........ 10.00

Adjusted bank balance....................

$22,016.40

Adjusted book balance. . $22,016.40

Part 2May31 Cash........................................ 7,200.00

Collection Expense................... 100.00Notes Receivable................. 7,300.00

To record collection of note less collection fee.

31 Accounts Receivable—Gertie Mayer 431.80Cash................................... 431.80


31 Bank Service Charges Expense.. 12.00Cash................................... 12.00

To record bank charges.

31 Utilities Expense...................... 10.00


Cash................................... 10.00To correct error.

Analysis componentThere are several possible reasons why the cancelled cheques returned with a bank statement may not be numbered sequentially. Common reasons for this include the following: — 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 previous period. — 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 the bank. — The issuer of the cheques may have voided one or more of the cheques in the numbered sequence, perhaps because of making an error in writing the cheques. Problem 9-7B (concluded) — Occasionally, a cheque will reach the bank but the bank will incorrectly charge the cheque to the wrong account. When the bank detects the error, it will return the cheque separately with a note of explanation.

Problem 9-8B (30 minutes) Part 1 MOUNTAINVIEW CO.Bank Reconcilliation

November 30, 2011Bank statement balance...................

$28,252 Book balance.................

$27,013

Add: Add: Deposit of November 30...........

2,43 5 Interest earned.

$ 17

$30,687 Proceeds of note 2,150

Less: Collection fee......................

3 0

2,13 7

$29,150

Deduct: Deduct: Outstanding cheques:

NSF—Jerry Skyles................. $905

No. 1393.......... $ 745 Error on cheque No. 1406.......... 1,322 no. 1404........ 50 955 No. 425 2,492 Copyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.Solutions Manual for Chapter 9 849

1408..........Adjusted bank balance..................

$28,195 Adjusted book balance...

$28,195

Part 2Nov.

30 Cash............................................ 2,120

Collection Expense....................... 30 Notes Receivable.................... 2,150 To record collection of note less fee.

30 Cash............................................ 17 Interest Revenue.................... 17 To record interest revenue.

30 Account Receivable—Jerry Skyles.. 905 Cash...................................... 905 To record NSF cheque.

30 Computer Equipment................... 50 Cash...................................... 50 To correct error.


Problem 9-9B (30 minutes)EMIRATES COMPANYBank ReconciliationFebruary 28, 2011


$ 9,600

Book balance...... $12,992

Add: Deposit of February

28 intransit..................

6,300

$15,900

Add: Note Rec’ble....$900

Less: Fee...... 20Error (Office Sup)198Interest Revenue 50

1,1 28

Deduct: $14,120


#200........... $ 330#202........... 1,600#205........... 110#213........... 35#240........... 200

2,275

Deduct:NSF—Tahani

Ahmad...............$435Cheque printing 60

495


$13,625

Adjusted book balance....................

$13,625

Feb. 28

Accounts Receivable – Tahani Ahmad............................................

435

Cash......................................... 435 To reinstate customer account re NSF cheque.

28 Cash............................................... 198Office Supplies.......................... 198

To correct error.

28 Office Supplies Expense................... 60Cash......................................... 60

To record cheque printing expense.

28 Cash............................................... 50


Interest Revenue...................... 50 To record interest earned.

28 Cash............................................... 880Collection Expense.......................... 20

Note Receivable........................ 900 To record collection of note less collection expense.


Problem 9-10BPart 1

HR CAFEBank ReconciliationDecember 31, 2011


$25,430

Book balance.............. $11,040

Add: Deposit of Dec. 31 in

transit........................Error........................

1,570 10,0

00$37,0

00

Add: Error (480 – 345)$ 135 Note Rec’ble....15,000

Less: Fee...... 10 Interest revenue 75

15,20 0

$26,240

Deduct:Outstanding cheques:

#197.........$4,000#199......... 9,000 13,0

00

Deduct:NSF – Neon Company$ 2,100 Service charge. 50 Error (930 – 840)

90

2,24 0


Adjusted book balance.$24,000

Part 2Dec. 31

Accounts Receivable – Della Armstrong.....................................

90

Cash......................................... 90 To correct error.

Accounts Receivable – Neon Company.......................................

2,100

Cash......................................... 2,100 To reinstate customer account re NSF cheque.

Cash.............................................. 135 Accounts Payable – CT Financial. 135 To correct error.


Bank Service Charges Expense....... 50 Cash......................................... 50 To record December bank charges.

Collection Expense......................... 10Cash.............................................. 15,065 Note Receivable........................ 15,00

0 Interest Revenue....................... 75 To record collection of note and interest less collection expense.


Problem 9-10B (concluded)

Analysis componentIf the entries in Part 2 were not recorded, net income and owner’s equity would be understated by $15 ($75 – $50 – $10 = $15); assets would be understated by $150 ($90 – $90 + $2,100 – $2,100 + $135 – $50 + $15,065 – $15,000 = $150); and liabilities would be understated by $135.

ANALYTICAL AND REVIEW PROBLEMS

A&R Problem 9-11.

CANDY’S CLEANING SERVICESBank Reconciliation

April 30, 2011

Bank balance. . $33,452

Book balance. . $21,051

Add: Error Cheque #879 2,6

00

Deduct:

$36,052

Interest expense................

47

Deduct: NSF................412 Error Cheque #93...................

$ 100

Service charge..............

40

4 99


15, 500

# 86............ 14,000

#100............ 1,4 00



$20,552

2.April30 Interest Expense......................... 47

Cash....................................... 47To record interest expense.


30 Accounts Receivable — Bonne...... 412Cash....................................... 412


30 Bank Service Charges Expense..... 40Cash....................................... 40



A&R Problem 9-2(a)

BRANDON COMPANYBank Reconciliation

May 31, 2011Balance per books............................ $ 9,500Add:......................collection of note $1,000

Interest thereon......................... 60 1,060$10,560

Deduct:.......................Bank charges $ 10Error re cheque #78................. 36NSF cheque—Rhonda Teal........ 500 546

Adjusted book balance..................... $10,014

Balance per bank............................. $ 9,359Add:......................Deposit in transit

2,455$11,814

Deduct:............Outstanding cheques 1,800

Adjusted bank balance..................... $10,014(b)

May 31 Cash...................................... 1,060 Notes Receivable............ 1,000 Interest Revenue............ 60

To record collection of note plus interest revenue.

31 Accounts Payable—Delta Co.. 36 Bank Service Charges Expense 10 Accounts Receivable—Rhonda Teal 500

Cash............................ 546 To record error, bank service charges, and NSF

cheque.


A&R Problem 9-31. The weakness in the operation of the petty cash fund is

that no one person is in charge of the funds and “disbursements” are made without approval of a responsible person and without supporting documentation (vouchers, invoices, etc.)Improvement in the operation of the fund can be accomplished by placing one individual in charge of the fund and requiring that disbursements from the fund can only be made on the basis of an authorized voucher, authorization to be by a person(s) other than the custodian of the fund.

2. The principle of objectivity is violated in that disbursements are made without the necessary documentation, that is, an authorized voucher supported by an invoice, cash register tape, etc.


Ethics ChallengeEC 9-11. In a small business office it is very important that the

owner of the business become involved with overseeing procedures. In this medical office it would enhance the internal control environment if Dr. Thomen would reconcile the bank statement.

2. Unfortunately, due to collusion of the employees the bank reconciliation will not detect the fraud. The cash deposits per the books will reconcile to the cash deposits per the bank.

3. Despite the collusion the scheme is not foolproof. The bank employee may become suspicious and call Dr. Thomen and ask if she is aware that occasionally her employees cash patient cheques for cash. An astute patient might notice that the statement received contains a miscellaneous credit rather than a cash payment notation. If the patient is aware of accounting practices Dr. Thomen might be advised. Dr. Thomen might be able to uncover the fraud herself if she reviews the daily posting log generated by most computers and notices in the batch totals that miscellaneous credits are posted at times instead of all cash payment credits.

4. Dr. Thomen should review her salary schedules for employees to make sure that she is at least offering market pay. She may want to consider bonding the employees to insure herself against material losses. Dr. Thomen should probably reconcile the bank statement herself as well as make it a practice to review the daily posting log for miscellaneous credits. Also she should implement a policy whereby she is the only one to authorize any miscellaneous credits to patient accounts.


Focus on Financial StatementsFFS 9-1

Worton ConsultingBalance Sheet

December 31, 2011Assets Current assets: Cash1........................................... $

14,500

Accounts receivable2.................... 28,500

Prepaid rent3............................... 7,0 00

Total current assets..................... $ 50,00

0

Property, plant and equipment: Store fixtures............................ $113,

250 Less: Accumulated amortization4....................................

90,2 00

23,0 50

Total assets................................... $ 73,05

0

Liabilities Current liabilities: Accounts payable...................... $18,0

00 Salaries payable........................ 4,000 Current portion of long-term note 27,0

00 Total current liabilities............ $

49,000

Long-term liabilities: Note payable, less $27,000 current portion.................................

15, 000

Total liabilities............................. $ 64,00

0

Owner’s EquityCopyright © 2007 by McGraw-Hill Ryerson Limited. All rights reserved.860 Fundamental Accounting Principles, Twelfth Canadian Edition

Ellis Worton, capital..................... 9,05 0

Total liabilities and owner’s equity. . $ 73,05

0


FFS 9-1 (concluded)Calculations:

1. Petty Cash has been combined with Cash = ($15,500 + $500) – $1,500 NSF cheque = $14,500

2. Accounts receivable = $27,000 + $1,500 NSF cheque = $28,500

3. Prepaid rent = $10,250 – $7,000 expired rent for December = $3,250 expired or used

4. Accumulated amortization = $82,000 + $8,200 amortization = $90,200

5. Rent expense = $92,000 + $3,250 expired rent for December = $95,250

6. Amortization expense = $0 + $8,200 amortization = $8,200

Analysis component:a.

Current Ratio Acid-Test Ratio$50,000/$49,000 = 1.02 ($14,500 +

$28,500)/$49,000 = 0.88Worton Consulting’s current ratio shows that at December 31, 2011 the company appears to have sufficient current assets to cover current liabilities as they come due. The acid-test ratio, a more strict measure of liquidity, shows that Worton does not have enough quick assets to cover current liabilities as they come due.

b.Current Ratio Acid-Test Ratio

$50,000/($18,000 + $4,000) = 2.27

($14,500 + $28,500)/ ($18,000 + $4,000) = 1.95

If Worton did not include the current portion of the long-term note as part of current liabilities, both the current ratio and acid-test ratio would portray a very strong liquidity position which, in fact, is not true. Misclassification can lead decision makers to make inappropriate decisions. This demonstrates the importance of classifying current vs. long-term assets and liabilities properly.


FFS 9-2

1. Cash is defined as money or any instrument that banks will accept for deposit and immediate credit to the company’s account, such as a cheque, money order, or bank draft. The CICA Handbook, Section 1540, defines cash equivalents as short-term, highly liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value such as bank certificates of deposit and Treasury bills issued by the government to finance its activities.

2. WestJet shows cash and cash equivalents of $259,640 (thousand) at December 31, 2005.

3. WestJet’s cash and cash equivalents increased by $111,108 (thousand) calculated as $259,640 (thousand) – $148,532 (thousand). This represents an increase of 75% calculated as $111,108/$148,532 x 100.

Analysis component:Yes, it is possible for there to be excessive cash and cash equivalents. The purpose of having assets, regardless of type, is to generate revenues either directly or indirectly. Although cash equivalents (investments) might generate revenue, it is classified as other revenue as opposed to revenue related to what the business is normally engaged in on a day-to-day basis. If WestJet, for example, had excessive cash and cash equivalents, they might want to consider purchasing additional aircraft and expanding their routes and/or diversifying their business by purchasing a supplier.


Critical Thinking QuestionCT 9-1Note to instructor: Student responses will vary therefore the answer here is only suggested and not inclusive of all possibilities; it is presented in point form for brevity.

Problem(s):— Internal controls over cash did not prevent a $35,000

theftGoal(s)*:

— To try and discover how the money disappeared and who is responsible

— To improve internal controls over cash

Assumption(s)/Principle(s):— That there is a bank nearby

Facts:— as presented

Conclusion(s)/Consequence(s):— Basic internal controls over cash need to be implemented

such as: cash collections must be deposited regularly into the

bank large amounts of cash must not be kept on the

premises for small amounts of cash that are kept on the

premises, a secure device is required as opposed to a filing cabinet

*The goal is highly dependent on “perspective.”


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