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Chapter 8

PROBLEM SET B
Problem 8-1B (20 minutes)
1. Violates both applying technological control and effective segregation
of duties. It is safe to assume that Latisha Tally has knowledge of
employee passwords since she implemented the system of password
protection companywide. It is a potentially insecure situation that
Latisha processes payroll and can now probably change employee pay
rates at will, or add a fictitious employee to the file. The company
should hire an outside consultant to rework the password protection
system so Latisha will not have the knowledge that she currently
possesses.
2. Violates applying technological controls. The theaters system needs to
be backed up at least daily, not weekly. The theater needs to change the
backup policy and make sure the backup copies are stored off premises.
3. Violates segregation of duties. The company needs to have three
employees handle these functions instead of two. One employee should
place purchase orders, one should receive merchandise, and the third
should pay vendors.
4. Violates applying technological controls. The use of the check protector
is a good internal control. However the company needs to keep the
checks and check protector in a locked environment to prevent
unauthorized use.
5. Violates segregation of duties. It is good internal control to separate
duties for cash receipts and cash disbursements.
Moreover, an
employee independent of these two functions should be given the
responsibility for reconciling the bank account monthly.
If no
employees are available, this is an acceptable duty for the owner as it
allows for owner oversight, which is good internal control.

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Solutions Manual, Chapter 8

19

Problem 8-2B (30 minutes)


Part 1
Mar. 5 Petty Cash..................................................................... 250
Cash.........................................................................

250

To establish the $250 petty cash fund.

Part 2
Blues Music Center
Petty Cash Payments Report (for March)
Delivery expense
Mar. 11 Delivery of customer's merchandise..........................

$ 10.75

Mileage expense
Mar. 30 Reimbursement for mileage........................................

56.80

Postage expense
Mar. 28 Paid postage.................................................................

18.00

Merchandise inventory (transportation-in)*


Mar. 6 COD charges on purchases........................................
$12.50
Mar. 27 COD charges on purchases........................................
45.10

57.60

Office supplies expense


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

46.32
$189.47

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

Part 3
Mar. 31 Delivery Expense..........................................................
10.75
Mileage Expense..........................................................
56.80
Postage Expense..........................................................
18.00
Merchandise Inventory................................................
57.60
Office Supplies Expense.............................................
46.32
Cash Over and Short..............................................
Cash.........................................................................

1.00
188.47

To reimburse the petty cash fund.

Mar. 31 Petty Cash.....................................................................


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

50.00

To increase the petty cash fund to $300.


2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

20

Fundamental Accounting Principles, 21st Edition

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

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 8

21

Problem 8-3B (20 minutes)


Part 1
Jan. 3 Petty Cash.....................................................................150.00
Cash.........................................................................

150.00

To establish the petty cash fund.

Jan. 14 Office Supplies Expense.............................................


Merchandise Inventory*...............................................
Repairs ExpenseComputer......................................
Miscellaneous Expenses.............................................
Cash Over and Short....................................................
Cash.........................................................................

14.29
19.60
38.57
12.82
2.44
87.72

To reimburse the petty cash fund.


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

Jan. 15 Petty Cash..................................................................... 50.00


Cash.........................................................................

50.00

To increase the petty cash fund.

Jan. 31 Advertising Expense....................................................


Postage Expenses........................................................
Delivery Expense..........................................................
Cash Over and Short....................................................
Cash.........................................................................

50.00
48.19
78.00
6.46
182.65

To reimburse the petty cash fund.**

Jan. 31 Petty Cash..................................................................... 50.00


Cash.........................................................................

50.00

To increase the petty cash fund.**


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

Part 2
If the January 31 reimbursement is not made and no entry is recorded, then
the expenses would not be recognized and both net income and equity
would be overstated by $182.65 ($50.00 + $48.19 + $78.00 + $6.46). Also,
the petty cash asset and total assets would be overstated by $182.65.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

22

Fundamental Accounting Principles, 21st Edition

Problem 8-4B (30 minutes)


Part 1
SEVERINO CO.
Bank Reconciliation
December 31, 2013
Bank statement balance...........
Add
Deposit of Dec. 31.................

Deduct
Checks No. 1242.... $ 410.40
1273.... 4,589.30
1282.... 400.00
Adjusted bank balance............

$46,822.40 Book balance............................................................


$32,878.30
Add
9,583.10
Error (Ck 1267). . $
9.00
56,405.50
Proceeds of note
less $20 fee..... 18,980.00 18,989.00
51,867.30
Deduct
NSF check........ $ 762.50
Printing fee........
99.00
5,399.70
861.50
$51,005.80 Adjusted book balance..............................................
$51,005.80

Part 2
Dec. 31 Cash...............................................................................9.00
Office Supplies.......................................................

9.00

To correct an entry error.

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

31 Accounts ReceivableTitus Industries.....................


762.50
Cash.........................................................................

762.50

To charge account for NSF check plus fees.

31 Miscellaneous Expenses.............................................
99.00
Cash.........................................................................

99.00

To record check printing charge.

Part 3
In a banking context, a debit memo is notification from the bank that it has
debited the depositor's account. Since the depositor's account is a liability of the
bank (a credit balance account), the debit notification means the bank has
reduced the depositor's account balance. Conversely, a credit memo is a
notification that the depositor's account has been credited, which means the
bank has increased the depositors cash balance.
2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 8

23

Problem 8-5B (50 minutes)


Part 1
SHAMARA SYSTEMS
Bank Reconciliation
May 31, 2013
Bank statement balance............
Add
Deposit of May 31...................

Deduct
Checks No. 1780....$1,425.90
1786.... 353.10
1789.... 639.50
Adjusted bank balance..............

$21,762.70 Book balance .........................................................


$15,177.30
Add
2,727.30
Proceeds of note less
24,490.00
$50 fee...............................................................
7,350.00
22,527.30
Deduct
NSF check.......$431.80
Service charge.. 14.00
2,418.50
Error (Ck 1788).. 10.00
455.80
$22,071.50 Adjusted book balance............................................
$22,071.50

Part 2
May 31 Cash...............................................................................
7,350.00
Collection Expense......................................................
50.00
Notes Receivable....................................................

7,400.00

To record note collection less fee.

31 Accounts ReceivableW. Sox....................................


431.80
Cash.........................................................................

431.80

To charge account for NSF check plus fee.

31 Miscellaneous Expenses.............................................
14.00
Cash.........................................................................

14.00

To record bank service fee.

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

10.00

To correct an entry error.

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any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

24

Fundamental Accounting Principles, 21st Edition

Problem 8-5B (Concluded)


Part 3
There are several possible reasons why some prenumbered checks are
missing from the sequence of canceled checks returned with a bank
statement. Reasons include:
(1) Some of the checks in the numbered sequence may have cleared the
bank in a previous period and were returned with the bank statement
in that previous period.
(2) Some of the checks in the numbered sequence may remain
outstanding. If so, they will be returned with the bank statement in a
later period when they clear the bank.
(3) The issuer of the checks may have voided one or more of the checks
in the numbered sequence, perhaps because of making an error in
writing the checks.
(4) Occasionally, a check will reach the bank but the bank will incorrectly
charge the check to the wrong account. When the bank detects the
error, it will return the check separately with a note of explanation to
the depositor.

2013 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in
any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.

Solutions Manual, Chapter 8

25

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