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Chapter 6

In-Class problems

QS 6-5 Bank reconciliation


For each of the following items a through g, indicate whether its amount (1)
affects the bank or book side of a bank reconciliation, (2) represents an addition
or a subtraction in a bank reconciliation, and (3) requires an adjusting journal
entry.

Bank or book Add or Adj. Entry or


side subtract Not
a) Interest on cash balance
b) Bank service charges
c) Minimum balance charge
d) Outstanding checks
e) Credit memo on collection
of note
f) NSF Checks
g) Outstanding deposits

QS 6-5 Bank reconciliation P3


Nolan Company deposits all cash receipts on the day when they are received and
it makes all cash payments by check. At the close of business on June 30, 2017, its
Cash account shows a $22,352 debit balance. Nolan’s June 30 bank statement
shows a $21,332 on deposit in the bank. Prepare a bank reconciliation for the
company using the following information.

a. Outstanding checks as of June 30 total $3,713


b. The June 30 bank statement lists $41 in bank service charges; the company
has not yet recorded the cost of these services.
c. In reviewing the bank statement, a $90 check written by the company was
mistakenly recorded in the company’s books at $99
d. June 30 cash receipts of $4,724 were placed in the bank’s night depository
after banking hours and were not recorded on the June 30 bank statement
e. The bank statement included a $23 credit for interest earned on the
company’s cash in the bank.

Exercise 6-1 Analyzing internal control

Franco Company is a rapidly growing start-up business. Its recordkeeper, who was
hired six months ago, left town after the company’s manager discovered that a
large sum of money had disappeared over the past three months. An audit
disclosed that the record keeper had written and signed several checks made
payable to her fiancé and then recorded the checks as salaries expense. The
fiancé, who cashed the checks but never worked for the company, left town with
the record keeper. As a result, the company incurred an uninsured loss of
$184,000.
Evaluate Franco’s internal control system and indicated which principles of
internal control appeared to have been ignored.
Exercise 6-2/6-4 internal control recommendations

What internal control procedures would you recommend in each of the following
situations?

1. A concession company has one employee who sells towels, coolers, and
sunglasses at the beach. Each day, the employee is given enough towels,
coolers, and sunglasses to last through the day and enough cash to make
change. The money is kept in a box at the stand.

2. Some of crown company’s cash receipts from customers are received by


the company with regular mail. The company’s recordkeeper opens these
letters and deposits the cash received each day.
a. Identify any internal control problems in this arrangement
b. What changes to its internal control system do you
recommend?
Exercise 6-5 Petty cash fund with a shortage P2
Waupaca Company establishes a $350 petty cash fund on September 9. On
September 30, the fund shows $104 in cash along with receipts for the following
expenditures: transportation-in, $40; postage expenses, $123; and miscellaneous
expenses, $80. The petty cashier could not account for a $3 shortage in the fund.

The company uses the perpetual system in accounting for merchandise inventory.
Prepare (1) the September 9 entry to establish the fund, (2) the September 30
entry to reimburse the fund, and (3) an October 1 entry to increase the fund to
$400.
QS 6-8 Days’ sales uncollected
The following annual account balances are taken from Armour Sports at
December 31

2017 2016
Accounts receivable $ 100,000 $ 85,000
Net sales 2,500,000 2,000,000

What is the change in the number of days’ sales uncollected between years 2016
and 2017? (Round the number of days to one decimal)

According to this analysis, is the company’s collection of receivables improving?


Explain.