5-10

   

Internal control of cash receipts

 

 

Obj|2, 3

 

     

   

    Kevin Clavin works at the drive-through window of Big Bad Burgers. Occasionally, when a drive-through customer orders, Kevin fills the order and pockets the customer’s money. He does not ring up the order on the cash register.

       Identify the internal control weaknesses that exist at Big Bad Burgers, and discuss what can be done to prevent this theft.

 

 

   

      E5-11

   

   

      Internal control of cash receipts

   

   

     

        Obj|2, 3

     

   

    The mailroom employees send all remittances and remittance advices to the cashier. The cashier deposits the cash in the bank and forwards the remittance advices and duplicate deposit slips to the Accounting Department.

a.

      Indicate the weak link in internal control in the handling of cash receipts.

   

   

      b.

      How can the weakness be corrected?

   

 

 

   

      E5-12

   

    Entry for cash sales; cash short

   

     

        Obj|2, 3

     

   

    The actual cash received from cash sales was $27,199, and the amount indicated by the cash register total was $27,228.

   

     

        a.

        What is the amount deposited in the bank for the day’s sales?

     

     

        b.

        What is the amount recorded for the day’s sales?

     

     

        c.

        How should the difference be recorded?

     

     

        d.

        If a cashier is consistently over or short, what action should be taken?

     

   

 

 

   

      E5-13

 

   

   

      Recording cash sales; cash over

The actual cash received from cash sales was $14,356, and the amount indicated by the cash register total was $14,290.

 

   

      a.

      What is the amount deposited in the bank for the day’s sales?

   

   

      b.

      What is amount recorded for the day’s sales?

   

   

      c.

      How should the difference be recorded?

   

   

      d.

      If a cashier is consistently over or short, what action should

5-15

Torpedo Digital Company, a communications equipment manufacturer, recently fell victim to a fraud scheme developed by one of its employees. To understand the scheme, it is necessary to review Torpedo’s procedures for the purchase of services.

     The purchasing agent is responsible for ordering services (such as repairs to a photocopy machine or office cleaning) after receiving a service requisition from an authorized manager. However, since no tangible goods are delivered, a receiving report is not prepared. When the Accounting Department receives an invoice billing Torpedo for a service call, the accounts payable clerk calls the manager who requested the service in order to verify that it was performed.

     The fraud scheme involves Ross Dunbar, the manager of plant and facilities. Ross arranged for his uncle’s company, Capo Industrial Supplies and Service, to be placed on Torpedo’s approved vendor list. Ross did not disclose the family relationship.

     On several occasions, Ross would submit a requisition for services to be provided by Capo Industrial Supplies and Service. However, the service requested was really not needed, and it was never performed. Capo Industrial Supplies and Service would bill Torpedo for the service and then split the cash payment with Ross.

     Explain what changes should be made to Torpedo’s procedures for ordering and paying for services in order to prevent such occurrences in the future.

1.

      Bank service charges, $40

      2.

      Check drawn by company for $480 but incorrectly recorded by company as $840.

   

   

      3.

      Check for $100 incorrectly charged by bank as $1,000.

   

   

      4.

      Check of a customer returned by bank to company because of insufficient funds, $975.

   

   

      5.

      Deposit in transit, $18,800.

   

   

      6.

      Outstanding checks, $12,200.

   

   

      7.

      Note collected by bank, $20,500.

   

 

 

   

      E5-17

   

   

      Entries based on bank reconciliation

   

   

     

        Obj|5

     

   

    Which of the reconciling items listed in Exercise 5-16 are required to be recorded in the company’s accounts?

 

 

      

      E5-16

   

   

      Bank reconciliation

   

   

     

        Obj|5

     

   

    Identify each of the following reconciling items as: (a) an addition to the cash balance according to the bank statement, (b) a deduction from the cash balance according to the bank statement, (c) an addition to the cash balance according to the company’s records, or (d) a deduction from the cash balance according to the company’s records. (None of the transactions reported by bank debit and credit memos have been recorded by the company.)

1.

      Bank service charges, $40.

   

   

      2.

      Check drawn by company for $480 but incorrectly recorded by company as $840.

   

   

      3.

      Check for $100 incorrectly charged by bank as $1,000.

   

   

      4.

      Check of a customer returned by bank to company because of insufficient funds, $975.

   

   

      5.

      Deposit in transit, $18,800.

   

   

      6.

      Outstanding checks, $12,200.

   

   

      7.

      Note collected by bank, $20,500.

   

 

 

   

      E5-17

   

   

      Entries based on bank reconciliation

   

   

     

        Obj|5

     

   

    Which of the reconciling items listed in Exercise 5-16 are required to be recorded in the company’s accounts?

 

 

   

      E5-18

 

   

   

      Bank reconcilliation

   

   

     

        Obj|5

     

     

        ✓ Adjusted balance: $24,500

     

   

    The following data were accumulated for use in reconciling the bank account of Camela Co. for July:

 

 

E6-1

Classifications of receivables

Obj|1

Boeing is one of the world’s major aerospace firms, with operations involving commercial aircraft, military aircraft, missiles, satellite systems, and information and battle management systems. As of December 31, 2010, Boeing had $2,969 million of receivables involving U.S. government contracts and $1,241 million of receivables involving commercial aircraft customers, such as Delta Air Lines and United Airlines.

   Should Boeing report these receivables separately in the financial statements, or combine them into one overall accounts receivable amount? Explain.

E6-2

 

Determine due date and interest on note

✓ Feb. 20, $450

Determine the due date and the amount of interest due at maturity on the following notes:

	Date of Note	Face Amount	Interest Rate	Term of Note
a.	January 6	$40,000	9%	45 days
b.	March 23	9,000	10	60 days
c.	May 30	12,000	12	90 days
d.	August 30	18,000	10	120 days
e.	October 1	10,500	8	60 days

E6-3

Nature of uncollectible accounts

MGM Resorts International owns and operates casinos including the MGM Grand and the Bellagio in Las Vegas, Nevada. For a recent year, the MGM Resorts International reported accounts and notes receivable of $415,654,000 and allowance for doubtful accounts of $93,760,000.

   International Business Machines (IBM) provides information technology services, including software, worldwide. For a recent year, IBM reported accounts receivable of $10,834,000,000 and allowance for doubtful accounts of $324,000,000.

• a. Compute the percentage of the allowance for doubtful accounts to the accounts and notes receivable for the MGM Mirage.
• b. Compute the percentage of the allowance for doubtful accounts to the accounts receivable for IBM.
• c. Discuss possible reasons for the difference in the two ratios computed in (a) and (b).

E6-4

Uncollectible accounts, using direct write-off method

Obj|3

Illustrate the effects on the accounts and financial statements of the following transactions in the accounts of MedTech Co., a local hospital supply company that uses the direct write-off method of accounting for uncollectible receivables:

Feb. 14.	Received $9,000 on an account and wrote off the remainder owed of $45,000 as uncollectible.
Dec. 23.	Reinstated the account that had been written off on February 14 and received $45,000 cash in full payment.

E6-5

Uncollectible receivables, using allowance method

Obj|4

Illustrate the effects on the accounts and financial statements of the following transactions in the accounts of A1 Kitchen Company, a restaurant supply company that uses the allowance method of accounting for uncollectible receivables:

Jan. 31.	Received $8,000 on an account and wrote off the remainder owed of $32,000 as uncollectible.
Nov. 2.	Reinstated the account that had been written off on January 31 and received $32,000 cash in full payment.

E6-6

Writing off accounts receivable

Objs|3, 4

Intermountain Technologies, a computer consulting firm, has decided to write off the $11,575 balance of an account owed by a customer. Illustrate the effects on the accounts and financial statements to record the write-off (a) assuming that the direct write-off method is used, and (b) assuming that the allowance method is used.

E6-7

 

Estimating doubtful accounts

Newbury Bikes Co. is a wholesaler of motorcycle supplies. An aging of the company’s accounts receivable on December 31, 2012, and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:

     Estimate what the balance of the allowance for doubtful accounts should be as of December 31, 2012.

   E6-8

    Entry for uncollectible accounts

    Using the data in Exercise 6-7, assume that the allowance for doubtful accounts for Newbury Bikes Co. had a negative balance of 2$3,800 as of December 31, 2012.

       Illustrate the effects of the adjustment for uncollectible accounts as of December 31, 2012, on the accounts and financial statements.

      E6-9

     Providing for doubtful accounts

Newbury Bikes Co. is a wholesaler of motorcycle supplies. An aging of the company’s accounts receivable on December 31, 2012, and a historical analysis of the percentage of uncollectible accounts in each age category are as follows:

 

   

 

     Estimate what the balance of the allowance for doubtful accounts should be as of December 31, 2012.

 

 List any errors you can find in the following partial balance:         

ZABEL COMPANY

Balance Sheet

December 31, 2012

Assets

Current assets:

Cash

$ 75,000

Notes receivable

$115,000

Less interest receivable

 

 

 

9,000

 

 

106,000

 

Account receivable

 

 

$475,000

         

  Plus allowance for doubtful accounts

         

     

            11,150

         

            486,150

        

      Ex: 6-18 

 

      Lower-of-cost-or-market inventory

On the basis of the following data, determine the value of the inventory at the lower of cost or market. Assemble the data in the form illustrated in Exhibit 9.

Commodity	Inventory Quantity	Unit Cost Price	Unit Market Price
Buffal	35	$115	$120
Dakota	67	90	75
Frontier	8	300	280
Midwest	83	40	30
Rainbow	100	90	94

  

 E7-3 

 

    Determine cost of land

✓ $715,725

Express Delivery Company acquired an adjacent lot to construct a new warehouse, paying $80,000 and giving a short-term note for $620,000. Legal fees paid were $1,900, delinquent taxes assumed were $9,000, and fees paid to remove an old building from the land were $6,000. Materials salvaged from the demolition of the building were sold for $1,175. A contractor was paid $800,000 to construct a new warehouse. Determine the cost of the land to be reported on the balance sheet.

E7-4 

 

Capital and revenue expenditures

Obj|1

Hometown Delivery Co. incurred the following costs related to trucks and vans used in operating its delivery service:

• 1. Changed the oil and greased the joints of all the trucks and vans.
• 2. Changed the radiator fluid on a truck that had been in service for the past four years.
• 3. Installed a hydraulic lift to a van.
• 4. Installed security systems on four of the newer trucks.
• 5. Overhauled the engine on one of the trucks purchased three years ago.
• 6. Rebuilt the transmission on one of the vans that had been driven 40,000 miles. The van was no longer under warranty.
• 7. Removed a two-way radio from one of the trucks and installed a new radio with a greater range of communication.
• 8. Repaired a flat tire on one of the vans.
• 9. Replaced a truck’s suspension system with a new suspension system that allows for the delivery of heavier loads.
• 10. Tinted the back and side windows of one of the vans to discourage theft of contents.

Classify each of the costs as a capital expenditure or a revenue expenditure

E7-8 due on 11/12

Straight-line depreciation

Obj|2

✓ $3,170

A refrigerator used by a meat processor has a cost of $86,750, an estimated residual value of $7,500, and an estimated useful life of 25 years. What is the amount of the annual depreciation computed by the straight-line method?