Practice Questions # 4

Q#1
“Internal control is concerned only with enhancing the accuracy of the accounting records.” Do you
agree? Explain.
Disagree. Internal control is also concerned with the safeguarding of company assets from employee
theft, robbery, and unauthorized use.

Q#2
Riverside Fertilizer Co. owns the following assets at the balance sheet date.

Cash in bank savings account $ 8,000

Cash on hand 850
Cash refund due from the IRS 1,000
Checking account balance 14,000
Postdated checks 500
What amount should Riverside report as cash in the balance sheet?
Cash should be reported at $22,850 ($8,000 + $850 + $14,000).

Q#3
Ken Deangelo Company’s internal controls over cash disbursements provide for the treasurer to sign
checks imprinted by a check-writing machine in indelible ink after comparing the check with the
approved invoice. Identify the internal control principles that are present in these controls.

The procedure and related principle are:

Procedure
(1) Treasurer signs checks.
(2) Checks imprinted by a machine in
indelible ink.
(3) Comparing check with approved
invoice before signing.
Principle
* Establishment of responsibility.
* Physical, mechanical, and electronic controls.
* Independent internal verification.

Q#4
What are the four steps involved in finding differences between the balance per books and balance per
bank?
The four steps are: (1) determine deposits in transit, (2) determine outstanding checks, (3) discover any
errors made, and (4) trace bank memoranda.

Q#5
(a) “Cash equivalents are the same as cash.” Do you agree? Explain. (b) How should restricted cash funds
be reported on the balance sheet?

(a) Cash equivalents are highly liquid investments that can be converted into a specific amount
of cash with maturities of three months or less when purchased. Cash equivalents may be
reported with cash in the current assets section of the balance sheet.
(b) Cash restricted for a special purpose should be reported as a current or noncurrent asset
depending on when the cash is expected to be used.
 Q#6
The following control procedures are used in Andy’s Antiques for cash disbursements.

1. The bookkeeper reconciles the bank statement and reports any discrepancies to the owner.
2. The store manager approves all payments before she signs and issues checks.
3. Each week Benton leaves 100 company cheques in an unmarked envelop on a shelf behind the cash
register
4. After payment, bills are filed in a paid invoice folder.
5. The company checks are unnumbered.
(a) For each procedure, explain the weakness in internal control, and identify the internal control
principle that is violated.
(b) For each weakness, suggest a change in the procedure that will result in good internal control.

EXERCISE 8-3

(a) (b)
Procedur Weakness Principle Recommended Change
e
1. The bank reconciliation is not Independent Someone with no
independently internal other cash
prepared. verification. responsibilities
should prepare the
bank reconciliation
2. The approval and payment Segregation of duties. The store manager
of bills is done by the same should approve bills
individual. for payment and the
treasurer should sign
and issue checks.

3. Checks are not stored in a Physical, mechanical, and Checks should be stored in a
secure area. electronic controls. safe or locked file drawer.

4. Filing does not prevent a Other controls Bills should be stamped PAID
bill from being paid more after payment.
than once.

5. Checks are not prenumbered. Documentation Checks should be

procedures. prenumbered and
subsequently accounted for.

Q#7
Stefan Pagnucci is unable to reconcile the bank balance at January 31. Stefan’s reconciliation
is as follows.
Cash balance per bank $3,560.20
Add: NSF check 690.00
Less: Bank service charge 25.00
Adjusted balance per bank $4,225.20
Cash balance per books $3,875.20
Less: Deposits in transit 530.00
Add: Outstanding checks 930.00
Adjusted balance per books $4,275.20

(a) Determine correct cash balance in books and Prepare a correct bank reconciliation.

EXERCISE 8-9
(a) Cash balance per bank statement....................... $3,560.20
Add: Deposits in transit......................................... 530.00
4,090.20
Less: Outstanding checks .................................... 930.00
Adjusted cash balance per bank.......................... $3,160.20

Cash balance per books ......................................... $3,875.20

Less: NSF check....................................................... $690.00
Bank service charge ................................... 25.00 715.00
Adjusted cash balance per books....................... $3,160.20

Q#8
On April 30, the bank reconciliation of Savana Company shows three outstanding checks: no. 254, $650,
no. 255, $820, and no. 257, $410.The May bank statement and the May cash payments journal show the
following.

Bank Statement
Checks Paid
Date Check No. Amount
5/4 254 650
5/2 257 410
5/17 258 159
5/12 259 275
5/20 261 500
5/29 263 480
5/30 262 750
.

Cash Payments Journal

Checks Issued
Date Check No. Amount
5/2 258 159
5/5 259 275
5/10 260 890
5/15 261 500
5/22 262 750
5/24 263 480
5/29 264 560
List the outstanding checks at May 31.

EXERCISE 8-10
The outstanding checks are as follows:
No. Amount
255 $ 820
260 890
264 560

Total $2,270

Q#9
The following information pertains to Vince’s Video Company.
1. Cash balance per bank, July 31, $7,263
2. July bank service charge not recorded by the depositor $28.
3. Cash balance per books, July 31, $7,284.
4. Deposits in transit, July 31, $1,500.
5. Bank collected $900 note for Vince’s in July, plus interest $36, less fee $20.The collection has
not been recorded by Vince’s, and no interest has been accrued.
6. Outstanding checks, July 31, $591.

Determine the correct cash book balance and prepare a bank reconciliation at July 31.

Bank Reconciliation
July 31
Cash balance per bank statement ........................................... $7,263
Add: Deposits in transit............................................................ 1,500
8,763
Less: Outstanding checks......................................................... 591
Adjusted cash balance per bank.............................................. $8,172

Cash balance per books.............................................................. $7,284

Add: Collection of note receivable
($900 plus accrued interest $36, less collection fee $20) ........................ . 916
8,200
Less: Bank service charge........................................................ 28
Adjusted cash balance per books ........................................... $8,172

Q # 10
The cash records of Givens Company show the following four situations.
1. The June 30 bank reconciliation indicated that deposits in transit total $720. During July the
general ledger account Cash shows deposits of $15,750, but the bank statement indicates that
only $15,600 in deposits were received during the month.
2. The June 30 bank reconciliation also reported outstanding checks of $680. During the month
of July, Givens Company books show that $17,200 of checks were issued. The bank statement
showed that $16,400 of checks cleared the bank in July.
3. In September, deposits per the bank statement totaled $26,700, deposits per books were
$25,400, and deposits in transit at September 30 were $2,100.
4. In September, cash disbursements per books were $23,700, checks clearing the bank were
$25,000, and outstanding checks at September 30 were $2,100.
There were no bank debit or credit memoranda. No errors were made by either the bank or
Givens Company.

Answer the following questions.

(a) In situation (1), what were the deposits in transit at July 31?
(b) In situation (2), what were the outstanding checks at July 31?
(c) In situation (3), what were the deposits in transit at August 31?
(d) In situation (4), what were the outstanding checks at August 31?

EXERCISE 8-13
(a) Deposits in transit: (This finds out the end balance)
Deposits per books in July .................................. $15,750
Less: Deposits per bank in July........................ $15,600
Deposits in transit, June 30.................... (720)
July receipts deposited in July........................... 14,880
Deposits in transit, July 31 .................................. $ 870

(b) Outstanding checks: (This finds out the end balance)

Checks per books in July .................................. $17,200
Less: Checks clearing bank in July .............. $16,400
Outstanding checks, June 30.............. (680)
July checks cleared in July............................... 15,720
Outstanding checks, July 31 ............................ $ 1,480

(c) Deposits in transit: (This finds out the beginning balance)

Deposits per bank statement in September ....................... $26,700
Add: Deposits in transit, September 30.............................. 2,100
Total deposits to be accounted for........................................ 28,800
Less: Deposits per books........................................................ 25,400
Deposits in transit, August 31................................................. $ 3,400

(d) Outstanding checks: (This finds out the beginning balance)

Checks clearing bank in September .................................... $25,000
Add: Outstanding checks, September 30 .......................... 2,100
Total checks to be accounted for........................................... 27,100
Less: Cash disbursements per books................................. 23,700
Outstanding checks, August 31 ............................................. $ 3,400

Q # 11
Pork Chop Company has recorded the following items in its financial records.
Cash in bank $47,000
Cash in plant expansion fund 100,000
Cash on hand 12,000
Highly liquid investments 34,000
Petty cash 500
Receivables from customers 89,000
Stock investments 61,000

The highly liquid investments had maturities of 3 months or less when they were purchased. The stock
investments will be sold in the next 6 to 12 months. The plant expansion project will begin in 3 years.
(a) What amount should Pork Chop report as “Cash and cash equivalents” on its balance sheet?
(b) Where should the items not included in part (a) be reported on the balance sheet?

EXERCISE 8-14
(a) Cash and cash equivalents should be reported at $93,500.
Cash in bank.................................................................................. $47,000
Cash on hand................................................................................ 12,000
Petty cash....................................................................................... 500
Highly liquid investments ......................................................... 34,000
$93,500

(b) “Cash in plant expansion fund” should be reported as part of long-term investments (a noncurrent
asset). “Receivables from customers” should be reported as accounts receivable in the current assets.
“Stock investments” should also be reported in the current assets.
Q # 12
The bank portion of the bank reconciliation for Chapin Company at October 31, 2008,
was as follows.
CHAPIN COMPANY
Bank Reconciliation
October 31, 2008
Cash balance per bank $11,444.20
Add: Deposits in transit 1,530.20
12,974.90
Less: Outstanding checks
Check Number Check Amount
2451 $1,260.40
2470 720.10
2471 844.50
2472 503.60
2474 1,050.00 4,378.60
Adjusted cash balance per bank $8,596.30

The adjusted cash balance per bank agreed with the cash balance per books at October 31.
The November bank statement showed the following checks and deposits:

Bank Statement
Checks Deposits
Date Number Amount Date Amount
11-1 2470 $ 720.10 11-1 $ 1,530.20
11-2 2471 844.50 11-4 1,211.60
11-5 2474 1,050.00 11-8 990.10
11-4 2475 1,640.70 11-13 2,575.00
11-8 2476 2,830.00 11-18 1,472.70
11-10 2477 600.00 11-21 2,945.00
11-15 2479 1,750.00 11-25 2,567.30
11-18 2480 1,330.00 11-28 1,650.00
11-27 2481 695.40 11-30 1,186.00
11-30 2483 575.50 Total $16,127.90
11-29 2486 900.00
Total $12,936.20

The cash records per books for November showed the following.

Cash Payments Journal

Date Number Amount Date Number Amount
11-1 2475 $ 1,640.70 11-20 2483 $ 575.50
11-2 2476 2,830.00 11-22 2484 829.50
11-2 2477 600.00 11-23 2485 974.80
11-4 2478 538.20 11-24 2486 900.00
11-8 2479 1,570.00 11-29 2487 398.00
11-10 2480 1,330.00 11-30 2488 1,200.00
11-15 2481 695.40 Total $14,694.10
11-18 2482 612.00

Cash Receipts
Journal
Date Amount
11-3 $ 1,211.60
11-7 990.00
11-12 2,575.00
11-17 1,472.70
11-20 2,954.00
11-24 2,567.30
11-27 1,650.00
11-29 1,186.00
11-30 2,338.00
Total $16,944.70

The bank statement contained two bank memoranda:

1. A credit of $2,505.00 for the collection of a $2,400 note for Chapin Company plus interest of
$120 and less a collection fee of $15. Chapin Company has not accrued any interest on the note.
2. A debit for the printing of additional company checks $72

At November 30, the cash balance per books was $10,846.90, and the cash balance per the bank statement
was $17,069.40. The bank did not make any errors, but two errors were made by Chapin Company.

Determine correct balance of cash book and prepare a bank reconciliation at November 30.

Bank Reconciliation
November 30, 2008
Balance per bank statement ............................... $17,069.40
Add: Deposits in transit............................... .... 2,338.00
19,407.40
Less: Outstanding checks
No. 2451.................................................... $1,260.40
No. 2472.................................................... 503.60
No. 2478.................................................... 538.20
No. 2482.................................................... 612.00
No. 2484.................................................... 829.50
No. 2485.................................................... 974.80
No. 2487.................................................... 398.00
No. 2488.................................................... 1,200.00 6,316.50
Adjusted cash balance per bank....................... $13,090.90

Balance per books ................................................. $10,846.90

Add: Note collected by bank
($2,400 note plus $120 interest less $15 fee) ........................................... 2,505.00
13,351.90
Less: Check printing charge ........................ $ 72.00
Error in recording check No. 2479 ......... 180.00*
Error in 11-21 deposit($2,954 – $2,945) .... 9.00 261.00
Adjusted cash balance per books .................... $13,090.90
*$1,750 – $1,570