Ed LarsonSol 09

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 supervisors 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
supervisors 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 ensure cheques are being written for
authorized expenditures only.

800
Fundamental Accounting Principles, Twelfth Canadian Edition
Quick Study 9-3

1.
May
1 Petty Cash......................................................................
Cash ......................................................................
To record establishment of fund.
2.
75.00
75.00
Wee Ones Agency

Petty Cash Payments Report
May 1 31, 2011
Receipts:
Entertainment expense
Film rentals ...............................................................
$19.4
0
Refreshments for meeting................................ 22.81 $42.21
Postage expense....................................................
6.95
Printing expense.....................................................
13.10
Total receipts ................................................................................................
$75.00
Fund total .........................................................................
12.74
Less: Cash remaining ..................................................
Equals: Cash required to replenish petty cash .....
Cash over/(short) ............................................................
May 31 Entertainment Expense..............................................
Postage Expense .........................................................
Printing Expense..........................................................
Cash ......................................................................
To reimburse the fund.
$62.26
62.26
$ -042.21
6.95
13.10
62.26
3. The Petty Cash account is credited when the size of the fund is being reduced or
the fund is being eliminated.
Quick Study 9-4
Mar. 17 Printing Expense..........................................................
Taxi Expense ................................................................
Delivery Expense .........................................................
Cash Over and Short...................................................
Cash ......................................................................
75.00
48.00
55.00
3.00
181.00

801

802
Quick Study 9-5

Sept. 23 Entertainment Expense..............................................
Computer Repair Expense ........................................
Delivery Expense .........................................................
Cash Over and Short.........................................
Cash ......................................................................
32.00
45.00
18.00
2.00
93.00
Quick Study 9-6

Feb.
Cash ................................................................................
73,125
Credit Card Expense...................................................
1,875
Sales .......................................................................
To record sale of merchandise less credit card expense;
75,000 x 2.5% = 1,875.
75,000
Cost of Goods Sold .....................................................

Merchandise Inventory ......................................
To record cost of sales.
62,000
62,000
10
Cash ................................................................................
Sales .......................................................................
To record sale of merchandise to cash customers.
28,000
10

23,000
28,000
23,000

803
Quick Study 9-7

Oct.
Cash ................................................................................
Debit Card Expense ....................................................
Sales .......................................................................
To record sale of merchandise less debit card
expense 14,000 x % = 35.
13,965
35

8,000
Cash ................................................................................
Sales .......................................................................
To record sale of merchandise to cash
customers.
3,500

2,800
14,000
8,000
3,500
2,800
Quick Study 9-8

Part 1
a.
b.
c.
d.
e.
f.
g.
Bank; add
Book; add
Book; add
Book; subtract
Bank; subtract
Book; subtract
Book; subtract
Part 2
JE required
JE required
JE required
JE required
JE required

804
Quick Study 9-9

BOLTON COMPANY
Bank Reconciliation
October 31, 2011
Bank statement balance ................
Add:
Outstanding deposit....................
Deduct:
Outstanding cheques:
#150: $ 980
#169: 2,515 .............................
Adjusted bank balance ..................
Oct. 31
$15,400
1,200
$16,600
3,495
$13,105
Book balance ........................ $13,150
Deduct:
Service charge...................
45
Adjusted book balance ...... $13,105
Service Charge Expense .....................................

Cash.....................................................................
To record bank service charge.
45
45
*Quick Study 9-10

Company As Acid-test Ratio
1,200 + 2,700 = 1.16
3,100 + 250
Company Bs Acid-test Ratio

1,200 + 2,700 = 0.68
4,750 + 950
Company A would be granted

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

805
EXERCISES
Exercise 9-1 (10 minutes)
Lombard Companys internal control system failed to require a separation of asset
custody and recordkeeping. The bookkeeper should not have been allowed to sign
the companys 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.
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.

806

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.
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 customers 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.

807

Part 1
a.
Jan. 1
b.
Petty Cash .....................................................................

Cash ........................................................................
To establish the fund.
200.00
Eanes Co.
January 1 8, 2011
Receipts:
Postage expense....................................................
$64.00
Merchandise inventory .........................................
19.00
Store supplies..........................................................
36.50
Jim Eanes, Withdrawals ........................................
53.00
Total receipts ................................................................................................
$200.00
Fund total .........................................................................
27.50
Cash over/(short) ............................................................
Jan.
200.00
Part 2
Jan. 8
Postage Expense.........................................................
Merchandise Inventory ..............................................
Store Supplies Expense*...........................................
Jim Eanes, Withdrawals .............................................
Cash ........................................................................
$172.50
172.50
$ -0-
64.00
19.00
36.50
53.00
Postage Expense.........................................................
64.00
19.00
Store Supplies Expense*...........................................
36.50
Jim Eanes, Withdrawals .............................................
53.00
Petty Cash ..................................................................... 300.00
Cash ........................................................................
To reimburse the fund and increase it by $300.
172.50
472.50
Analysis Component
If the January 8 entry to reimburse the fund was not recorded, net income would be
overstated.

808
* 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.

809

a.
Sept. 9
b.
Petty Cash .....................................................................

Cash ........................................................................
400.00
Brady Company
September 9 30, 2011
Receipts:
Merchandise inventory ........................................
Office supplies........................................................
Repairs expense....................................................
Total receipts ..................................................................
Fund total ........................................................................
Less: Cash remaining .................................................
Equals: Cash required to replenish petty cash ....
Cash over/(short) ...........................................................
Sept. 30
400.00
$
32.45
113.55
87.60
$400.00
146.40
$233.60)
253.60)
($ 20.00)

32.45
Office Supplies Expense*.......................................... 113.55
Repairs Expense..........................................................
87.60
Cash Over and Short ..................................................
20.00
Petty Cash .............................................................
Cash ........................................................................
To reimburse the fund and decrease it by $100.
100.00
153.60
Analysis component:
There are several things that could be done. The Marketing Manager should review
the prior months 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 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).

810
* Either Office Supplies Expense (an expense) or Office Supplies (an asset) could be

811

a.
Oct. 31 Cleaning Expense .........................................................
Postage Expense...........................................................
Delivery Expense ...........................................................
Cash Over and Short ..........................................
Cash........................................................................
120.00
79.00
60.00
b.
Nov. 30 Computer Repair Expense ..........................................
Entertainment Expense................................................
Cash Over and Short ....................................................
Cash .........................................................................
75.00
156.00
2.00
c.
Dec. 31 Gas Expense...................................................................
Office Supplies Expense*............................................
Entertainment Expense................................................
Petty Cash .......................................................................
Cash .........................................................................
To reimburse and increase the fund.
80.00
140.00
62.00
100.00
4.00
255.00
233.00
382.00

812

Oct.
Cash ................................................................................
Service Revenue..................................................
To record sale of services less debit card
expense; 0.5% x 105,000 = 525.
104,475
525
Cash ................................................................................
Service Revenue..................................................
To record sale of services provided for cash.
37,000
Cash ................................................................................
Service Revenue..................................................
To record sale of services less credit card
expense; 2% x 61,000 = 1,220.
59,780
1,220
10
Accounts Receivable Edson CHC ........................

Service Revenue..................................................
To record sale of services.
84,000
25
Cash ................................................................................
Sales Discounts ...........................................................
Accounts Receivable Edson CHC ................
To record collection of Oct. 10 credit sale;
2% x 84,000 = 3,680.
80,320
3,680
105,000
37,000
61,000
84,000
84,000

813

Jan. 15
Cash ................................................................................
Sales .......................................................................
To record sale of merchandise to cash customers.
56,000
15

36,400
17
Accounts Receivable..................................................
Sales .......................................................................
To record sale of merchandise on terms 2/10, n30.
15,800
17

12,000
20
Cash ................................................................................
Sales .......................................................................
To record sale of merchandise less credit card
expense; 114,000 x 2% = 2,280.
111,720
2,280
20

74,100
25
Cash ................................................................................
Sales .......................................................................
To record sale of merchandise less debit card
expense; 0.5% x 72,000 = 360.
71,640
360

46,800
25
56,000
36,400
15,800
12,000
114,000
74,100
72,000
46,800

814
Exercise 9-9 (concluded)

Analysis component
Cash 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.

815

1.
PELZER HOLDINGS
Bank Reconciliation
July 31, 2011
Bank statement balance ................

Add:
Outstanding deposit....................
Bank error (Peltza cheque).........
Deduct:
#14: $ 600
#54: 140................................
Adjusted bank balance ..................
2.
July 31
$9,848
572
560
$10,980
1,480
$9,500
Book balance ........................ $9,740
Deduct:
NSF Jim Anderson.......
240
Adjusted book balance ...... $9,500
Accounts Receivable Jim Anderson.............

Cash.....................................................................
To reinstate customer account.
240
240
Analysis component
If the journal entry in (2) is not recorded, net income, liabilities, and owners equity
would not be affected. Assets would be increased and decreased by the same amount
causing a net change of zero.
Bank statement balance ...........

Add:.................................................
Deposit of July 31 ................
Deduct:...........................................
Outstanding cheques.........
Adjusted bank balance ..............
MEDLINE SERVICE CO.

Bank Reconciliation
July 31, 2011
$10,332
Book balance of cash.............
Add:
2,724
Error on Ch. No. 919........
$13,056
Deduct:
1,713
Bank service charge.......
$11,343
Adjusted book balance..........
$11,352
9
$11,361
18
$11,343

816
Exercise 9-11 (concluded)

b.
July 31
Cash ................................................................................
Utilities Expense ..................................................
To correct error.
31
Bank Service Charges Expense ..............................

Cash ........................................................................
To record bank service charges.
18
18
Analysis component
If the journal entries in part (a) were not recorded, net income, assets, and owners
equity would each be overstated by a net amount of $9 ($18 - $9 = $9); liabilities are
not affected by the entries in (a).

817
1. Interest earned on the account.

2. Deposit made on September 30
after the bank was closed.
3. Cheques outstanding on August
31 that cleared the bank in
September.
4. NSF cheque from customer
returned on September 15 but
not recorded by the company.
5. Cheques written and mailed to
payees on September 30.
6. Deposit made on September 5
that was processed on
September 8.
7. Bank service charge.
8. Cheques written and mailed to
payees on October 5.
9. Cheque written by another
depositor but charged against
the company's account.
10. Principal and interest
collected by the bank but not
recorded by the company.
11. Special charge for collection
of note in No. 10 on company's
behalf.
12. Cheque written against the
account and cleared by the
bank; erroneously omitted by
the bookkeeper.
Not Shown
Bank Balance
Book Balance
on the
Must ReconcilAdd Deduct Add Deduct Adjust iation
x
Dr.
x
x
x
Cr.
Cr.
x
x
x
x
Dr.
x
Cr.
Cr.

818
*Exercise 9-13 (15 minutes)

Cash ......................................................
Short-term investments ...................
Accounts receivable.........................
Quick assets .......................................
Case X
$ 800
-0-0$ 800
Case Y
$ 910
-0990
$1,900
Case Z
$1,100
500
800
$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.

819
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 employees
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.

820
Problem 9-2A (30 minutes) Part 1

Feb.
Petty Cash ...............................................................

Cash ..................................................................
350
350
Part 2
PALLADIUM ART GALLERY
February 2 28, 2011
Receipts:
Delivery expense
Feb. 23 Delivery of customers
$18.00
merchandise............................................................
Auto expense
Feb. 14 Reimbursement for business
auto expense...........................................................
100.00
Postage expense
Feb. 12 Express delivery of contract............... $
9.95
28 Purchased stamps................................
73.95
64.00
Transportation-in (Merchandise Inventory)
Feb. 9 COD charges on purchased
merchandise............................................
$22.5
0
25 COD charges on purchased
merchandise...........................................
15.10
37.60
Office supplies
Feb. 5 Purchased paper for copier...............
$10.1
3
20 Purchased stationery...........................
87.89
77.76
Total receipts ................................................................................................
$317.44
$350.00
Fund total .........................................................................
29.23
320.77
Cash over/(short) ............................................................
($ 3.33)

821
Problem 9-2A (concluded)

Part 3
Feb. 28
Delivery Expense ...................................................

Auto Expense .........................................................
Postage Expense...................................................
Merchandise Inventory ........................................
Office Supplies Expense*....................................
Cash Over and Short ............................................
Petty Cash ...............................................................
Cash ..................................................................
To reimburse fund and increase it by $50.
18.00
100.00
73.95
37.60
87.89
3.33
50.00
370.77
Analysis component
This 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 managers response to your question. It is then the
owners 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.
they are for immedia te use which justifies using an expense account over an asset.

822

Apr.
Petty Cash ...............................................................

Cash ..................................................................
To establish fund.
250.00
15
Advertising Expense ............................................

Janitorial Expense.................................................
Postage Expense...................................................
Petty Cash ...............................................................
Cash Over and Short ....................................
Cash ..................................................................
To reimburse fund and increase it by $200.
57.15
78.00
43.50
63.68
200.00

Auto Expense .........................................................
Petty Cash .......................................................
Cash ..................................................................
To reimburse fund and decrease it by $50.
39.75
28.50
48.36
30
250.00
3.48
438.85
50.00
66.61
Analysis component
If the April 30 replenishment is not made and no entry is recorded, several expenses
would not be recognized and net income and owners 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.

823

a.
DARTMOUTH COMPANY
Bank Reconciliation
June 30, 2011
Bank statement balance ............
Add:
Deposit of June 29 ..................
Deduct:
No. 888..........
1,186.30
No. 890..........
1,146.40
No. 892..........
1,106.70
No. 893..........
1,164.80
$
8,379.34
2,220.85
10,600.19
4,604.20
$
5,995.99
Book balance....................
Add:
Error, cheque no. 887 .
Error, cheque no. 891 .
$4,941.69
1,000.00
100.00
$6,041.69
Deduct:
Bank service charges.
45.70
Adjusted book balance ..
$5,995.99
b.
June 30
Cash ..................................................................................
Office Supplies .......................................................
To account for error in Cheque #887.
1,000.00
30
Cash ..................................................................................
Utilities Expense ....................................................
100.00
30
Bank Service Charge Expense...................................

Cash ..........................................................................
To record bank service charges for June.
45.70
1,000.00
100.00
45.70
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 employees
home, should be brought to the supervisors attention. Prior bank reconciliations
should be reviewed to determine if this is a recurring situation. If conflicting duties
824
cannot be segregated in future, the bank reconciliations should be reviewed regularly

by a supervisor/owner of the business.
a)
HOLLIDAY ADVENTURES
Bank Reconciliation
April 30, 2011
Deduct:
#79.................
$5,200
#91.................
800
#96.................
640
#100...............
2,800
b)
Apr. 30
$46,904
Book balance..............
Add:
Interest revenue .....
Error Chq #93..........
$42,916
$94
198
Deduct:
NSF ................................$824
Payment.......................4,200
Interest Expense ........ 640
Service Charge ........... 80
9,440
$37,464
Adjusted book balance ........
Cash ..................................................................................
Interest Revenue....................................................
To record interest earned.
94
30
Cash ..................................................................................
198
30
Accounts Receivable Jon Smith ............................

Cash ..........................................................................
824
30
Loan Payable ..................................................................

Cash ..........................................................................
To record April loan payment.
4,200
30
Interest Expense............................................................
Cash ..........................................................................
To record April interest expense.
640
292
$43,208
5,744
$37,464
94
198
824
4,200
640

825
30
Bank Service Charges Expense ................................

Cash ..........................................................................
To record April bank charges.
80
80

DEWEERD COMPANY
Bank Reconciliation
October 31, 2011
$56,040
Book balance of cash ...........
Add:
Add:
Deposit of October 31.............
20,304
Proceeds of note less
$76,344
collection charge
($18,000 $90)....................
Deduct:
Cheques No. 3031 ..... $2,760
3065.......
672
3069....... 4,296
7,728
$68,616
$52,796
17,910
$70,706
Deduct:
NSF cheque and fee
Jefferson Tyler .....$1,610
Service charge..........
30
Error recording Cheque
No. 3056.................. 450
2,090
Adjusted book balance ........ $68,616
Part 2
Oct. 31
Cash ......................................................................................
Collection Expense ...........................................................
Notes Receivable.......................................................
To record collection of note less collection fee.
17,910
90
31
Accounts ReceivableJefferson Tyler .......................

Cash ..............................................................................
To record NSF cheque.
1,610
31
Bank Service Charges Expense ....................................

Cash ..............................................................................
To record bank service charges.
30
31
Rent Expense .....................................................................

Cash ..............................................................................
To correct error.
450
18,000
1,610
30
450

826

Analysis component
a. If the companys 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 banks 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.

827

MORGAN COMPANY
Bank Reconciliation
September 30, 2011
Bank statement balance ..........
Add:
Deposit of September 30 .....
$36,727.10
3,165.50
$39,892.60
Deduct:
Cheques No. 5893...... $968.50
5906...... 1,718.60
5908...... 552.00
Adjusted bank balance
3,239.10
$36,653.50
Book balance of cash.........

Add:
Interest earned.................
Proceeds of note less
collection fee ........................
$35,075.00
45.00
2,770.00
$37,890.00
Deduct:
NSF cheque
Delia Hahn .........$1,176.50
Error on Cheque
No. 5904 ............. 60.00 1,236.50
Adjusted book balance.. $36,653.50
Part 2
Sept. 30
30
Cash ..........................................................................
Interest Revenue............................................
To record interest earned.
45.00
45.00
Cash ..........................................................................
2,770.00
Collection Expense ...............................................
30.00
Notes Receivable ...........................................
To record collection of note less collection fee.
2,800.00
30
Accounts ReceivableDelia Hahn ...................

Cash ..................................................................
To record NSF cheque.
1,176.50
1,176.50
30
Computer Equipment ...........................................

Cash ..................................................................
To correct error.
60.00
60.00

828

Analysis component
There 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.
a)
OZZIE MINING
Bank Reconciliation
April 30, 2011
Bank statement balance ............... $52,660

Add:
Deposit of April 30 in transit..... 26,000
Error (Chq #28: 16,400 10,400)
6,000
$84,660
Deduct:
#14............ $3,200
#22............ 6,400
#25............ 2,000
#27............ 1,300
#30............
200
#32............
680
13,780
Adjusted bank balance ................. $70,880
Book balance..........................
Add:
Owner Investment..............
$50,120
50,000
$100,120
Deduct:
NSF Don James...... $8,000
Service charge.............
240
Interest expense ......... 1,000
Payment ........................ 20,000
Adjusted book balance ........
29,240
$70,880

829

b)
Apr. 30
Accounts Receivable Don James ............................

Cash ............................................................................
8,000
30
Bank Service Charges Expense ..................................

Cash ............................................................................
To record April bank service charges.
240
30
Interest Expense..............................................................
Cash ............................................................................
To record April interest expense.
1,000
30
Note Payable .....................................................................

Cash ............................................................................
To record April payment on note.
20,000
30
Cash ....................................................................................
Walt Ozzie, Capital...................................................
To record investment by owner.
50,000
8,000
240
1,000
20,000
50,000

830

a)
RED SEA COMPANY

Bank Reconciliation
November 30, 2011
Bank statement balance ............. $112,548.4

0
Add:
Deposit of Nov 30 in transit.... 3,830.80
$116,379.2
0
Deduct:
#1224........ $3,270.58
#1230........ 4,936.60
#1232........ 7,250.30
#1233........
964.34
16,421.82
Adjusted bank balance ............... $99,957.38
* Oct 31 adjusted balance of
Add: November receipts
Less: November disbursements
November 30 unadjusted balance
b)
Nov. 30
Book balance .........................

Add:
Interest revenue ................
Deduct:
NSF ....................... $744.26
Service charge... 54.80
$98,356.44*
2,400.00
$100,756.44
799.06
Adjusted book balance ....... $99,957.38
$ 83,695.70
347,047.82
332,387.08
$ 98,356.44
Bank Service Charges Expense ........................

Cash ..................................................................
To record November bank charges.
54.80
30
Accounts Receivable Trevor Clerk ................

Cash ..................................................................
744.26
30
Cash ..........................................................................
Interest Revenue............................................
To record interest earned in November.
2,400.00
54.80
744.26
2,400.00

831

Part 1
Bank statement balance .............

Add:
Deposit of October 31 in
transit.......................................
Error .............................................
Deduct:
#2033................ $3,200
#2099................ 850
#2300................ 1,800
#2345................ 5,400
Adjusted bank balance ...............
DUNDEE REALTY
Bank Reconciliation
October 31, 2011
$48,260 Book balance................................. $38,535
Add:
Error (A/P: 980 890)........ 90
2,300
Note Receivable ................5,000
1,700
Less: Collection Fee.... 45
$52,260
Interest Revenue............... 350
5,395
43,930
Deduct:
Service charge...................$ 220
Error (18,500 15,800) .....2,700
2,920
11,250
$41,010 Adjusted bank balance ...............
$41,010

832

Part 2
Oct. 31 Bank Service Charges Expense............................
Cash......................................................................
To record October bank charges.
220
31 Accounts Receivable Teresa Krant...................

Cash......................................................................
To correct error.
2,700
31 Cash..............................................................................
Accounts Payable Decker Company.........
To correct error.
90
31 Cash..............................................................................
Collection Expense...................................................
Note Receivable .................................................
Interest Revenue................................................
To record collection of note plus interest
earned less collection expense.
5,305
45
220
2,700
90
5,000
350
Analysis component
If the entries in Part 2 are not recorded, net income and owners equity would be understated 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.

833

834

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Chapter 9

Internal Control and Cash

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Quick Study 9-3

Wee Ones Agency

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Quick Study 9-5

Quick Study 9-6

Cost of Goods Sold .....................................................

Cost of Goods Sold .....................................................

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Quick Study 9-7

Cost of Goods Sold .....................................................

Cost of Goods Sold .....................................................

Quick Study 9-8

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Quick Study 9-9

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

Adjusted book balance ...... $13,105

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

*Quick Study 9-10

Company Bs Acid-test Ratio

Company A would be granted

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Exercise 9-3 (15 minutes)

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Exercise 9-5 (20 minutes)

Petty Cash .....................................................................

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Exercise 9-6 (20 minutes)

Petty Cash .....................................................................

Merchandise Inventory ..............................................

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Exercise 9-7 (20 minutes)

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Exercise 9-8 (20 minutes)

Accounts Receivable Edson CHC ........................

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Exercise 9-9 (30 minutes)

Cost of Goods Sold .....................................................

Cost of Goods Sold .....................................................

Cost of Goods Sold .....................................................

Cost of Goods Sold .....................................................

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Fundamental Accounting Principles, Twelfth Canadian Edition

Exercise 9-9 (concluded)

Copyright 2007 by McGraw -Hill Ryerson Limited. All rights reserved.

Exercise 9-10 (25 minutes)

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

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

Adjusted book balance ...... $9,500