ACC225 Week 8 Checkpoint

QS 8-6

Bank reconciliation

P3

1.      For each of the following items, indicate whether its amount (i) affects the bank or book side of a bank reconciliation and (ii) represents an addition or a subtraction in a bank reconciliation:

a.       Outstanding checks          Bank                Subtraction in Bank reconciliation

b.      Debit memos                     Book               Subtraction in Bank reconciliation

c.       NSF checks                       Book               Subtraction in Bank reconciliation

d.      Unrecorded deposits         Bank                Addition in Bank reconciliation

e.       Interest on cash balance    Book               Addition in Bank reconciliation

f.       Credit memos                    Book               Addition in Bank reconciliation

g.      Bank service charges         Book               Subtraction in Bank reconciliation

2.      Which of the items in part 1 require an adjusting journal entry?  Only those items that adjust the book balance require an adjusted journal entry.  In this case those would be debit memos, nsf checks, interest on cash balance, credit memos and bank service charges. 

Exercise 8-3

Analyzing internal control

C1

Bemis Company is a rapidly growing start-up business. Its recordkeeper, who was hired one year ago, left town after the company’s manager discovered that a large sum of money had disappeared over the past six months. An audit disclosed that the recordkeeper 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 recordkeeper. As a result, the company incurred an uninsured loss of $84,000. Evaluate Bemis’s internal control system and indicate which principles of internal control appear to have been ignored.

Several internal controls appear to either have been circumvented or were not put in place.  First of all there is no separation of duties (#4).  The same person who approves the spending of the funds is the same person as the one who cuts the checks.  There is also the question of if this is the same person who signs the checks or is this simply a case of the signer did not look at the checks and verify before signing.  Also, obviously there was a breakdown of adequate and correct records, as she would have altered books to appear legitimate (#2).   I am assuming there were no adequate technological controls to protect against this kind of theft, since she was capable of getting around them (#6).  The story did indicate the recordkeeper was not insured which is a breakdown of the internal control indicating employees should be bonded and assets insured (#3).  There was also no back up to check the records of this employee so the internal control that talks about division of responsibility for related transactions was ignored as well (#5).  Finally, I would say that six months is too long for a brand new company to go without an internal audit, especially since their recordkeeper was apparently responsible for many individual tasks and this would indicate that the last internal control was also ignored that indicates that regular and independent reviews take place (#7).

Exercise 8-4

Petty cash fund with a shortage

P2

Gannon Company establishes a $400 petty cash fund on September 9. On September 30, the fund shows $166 in cash along with receipts for the following expenditures: transportation-in, $32; postage expenses, $113; and miscellaneous expenses, $87. The petty cashier could not account for a $2 shortage in the fund. Gannon uses the perpetual system in accounting for merchandise inventory. Prepare (1) the September 9 entry to establish the fund and (2) the September 30 entry to both reimburse the fund and reduce it to $300.

Date	Account	Debit	Credit
Sept 9	Petty Cash	400
	Cash		400
Sep 30	Transportation-in	32
	Postage expenses	113
	Misc expenses	87
	Cash over or short	2
	Cash		234
	Cash	100
	Petty Cash		100