Lesson 12
Internal Controls and Business Ethics
Exercise
1.Lacy Leggs Lingerie had the following petty cash transactions in April of the current year:
April 1 Wrote a $500 check,cashed it,and gave the proceeds to Kate Small,the petty cashier.
5 Purchased gift-wrapping paper,$30.30.
8 Paid $49.00 COD shipping charges on teddies purchased for resale,terms FOB shipping
point,Lacy Leggs uses the perpetual system to account for inventory.
14 Paid $6.90 postage to express mail lingerie to a client.
19 Reimbursed Ivana Profit,the manager,$70 for a business lunch with a client.
20 Purchased gift-wrapping paper,$56.80.
21 Paid a courier $25 to deliver merchandise sold to a customer,terms FOB destination.
25 Paid $15.75 COD shipping charges on merchandise purchased for resale,terms FOB
shipping point.
27 Paid $83 for stamps,envelopes,and address lablels
30 Sorted the petty cash receipts by accounts affected and exchanged them for a check to
Both reimburse the fund for expenditures and decrease the amount of the fund to $400,There was $165.25 in the fund.
Required
(1) Prepare the journal entry to establish the petty cash fund.
(2)Prepare a petty cash payments report for April with these categories,delivery expense,entertainment expense,postage expense,merchandise inventory (transportation-in),and office supplies,Sort the payments into the appropriate categories and total the expenditures in each category.
(3)Prepare the journal entry to both reimburse and decrease the amount in the fund.
2.For each of these five separate cases,identify the principle of internal control that is violated,Recommend what the business should do to ensure adherence to principles of internal control.
(1)Jack McSweeny records all incoming customer cash receipts for his employer and writes off uncollectible accounts at year-end.
(2)At Tasty Foods,Bill and Betty work the cash registers and bag groceries,To alleviate the boredom they switch off between bagging and running the cash register every half hour,
(3)Marcia Ball does all the posting of accounts payable charges at the Provincial Motel,She prepares the accounts payable vouchers for payment,signs the vouchers,and wirtes the checks.
(4)Melissa Hancock prides herself on hiring quality workers who require little supervision,She sees no reason to to insult her best cashier by requiring approval signatures on such small amounts as petty cash disbursements and replenishment,
(5)Homer Scrooge has just calculated the total amount his business has paid in insurance premiums over the last ten years,His actaul insurance claims have only been 10% of the total paid,He decides to self-insure and save on premiums.
3.The following information is available to reconcile Wild Willy’s Whitewash Co,book balance of cash with its bank statement cash balance as of July 31,2005:
a. After all posting is complete on July 31,the company’s Cash account has a $13,805 debit balance,but its bank statement shows a $14,350 balance.
b. Checks outstanding total $4,180.
c. In comparing the canceled checks returned by the bank with the entries in the accounting records,it is found that Check No,2222 for July phone bill was correctly written and drawn for $720 but was erroneously entered in the accounting records as $270.
d. The bank charged Wild Willy’s $40 for a safe-deposit box,Wild Willy’s does not have a safe-deposit box.
e. A debit memorandum for $125 lists a $100 NSF check plus a $25 NSF charge,The check had been received from the Public Trust bank,Wild Willy has not yet recorded this check as NSF.
f. Enclosed with the statement is a $20 debit memorandum for bank services,It has not yet been recorded because no previous notification had been received.
g. The July 31 daily cash receipts of $3,000 were placed in the bank’s night depository on that date but do not appear on the July 31 bank statement.
Required
Preparation Component
(1)Prepare a bank reconciliation for this company as of July 31,2005.
(2)Prepare the journal entries necessary to bring the company’s book balance of cash into conformity with the reconciled cash balance as of July 31,2005.
4.Sheila and The Screamers most recently reconciled its bank statement and book balances of cash on August 31 and it showed two checks outstanding,No,6248 for $205 and No,6250 for $480,The following information is available for its September 30,2002,reconciliation:
From the September 30 Bank Statement
From Sheila’s Accounting Records
Cash Receipts Deposited
Cash
Date Debit
Sept. 5 300.00
13 450.00
18 7,200.00
19 960.00
30 1,200.00
_________
10,110.00
Cash Disbursements
Check Cash
No, Credit
6252 500.00
6253 220.00
6254 280.00
6255 1,200.00
6256 20.00
6257 970.00
6258 210.00
6259 40.00
6260 150.00
________
3,590.00
Cash Acct,No,101
Date Explanation PR Debit Credit Balance
Aug. 31 Balance 9,490.00
Sept.30 Total receipts R12 10,110.00 19,600.00
30 Total disbursements D23 3,590.00 16,010.00
Other Information
The bank statement shows an end of month balance of $17,750,Check No,6248 from last month did appear on this month’s bank statement but check No,6250 along with check No,6255 and No,6260 are still outstanding,The September 30 deposit of $1,200 does not appear on the bank statement,The bank statement showed that the band earned $50 of interest income during the month.
Check No,6258 is correctly drawn for $210 to pay for audio equipment; however,the recordkeeper misread the amount and entered it in the accounting records with a debit to Audio Equipment and a credit to Cash of $120,A $420 check shown received from a customer,M,Gordon,in payment of his account was returned NSF,Its return had not been recorded when the bank first notified the company,The bank statement showed the collection of a $1,600 note for the band by the bank,The bank deducted a $30 collection fee,The collection and fee are not yet recorded.
Required
Preparation Component
(1)Prepare the September 30,2002,bank reconciliation for this company.
(2)Prepare the journal entries to adjust the book balance of cash to the reconciled balance.
Analysis Component
(3)The bank statement reveals that some of the prenumbered checks in the sequence are missing,Describe three possible situations that could explain this.
Internal Controls and Business Ethics
Exercise
1.Lacy Leggs Lingerie had the following petty cash transactions in April of the current year:
April 1 Wrote a $500 check,cashed it,and gave the proceeds to Kate Small,the petty cashier.
5 Purchased gift-wrapping paper,$30.30.
8 Paid $49.00 COD shipping charges on teddies purchased for resale,terms FOB shipping
point,Lacy Leggs uses the perpetual system to account for inventory.
14 Paid $6.90 postage to express mail lingerie to a client.
19 Reimbursed Ivana Profit,the manager,$70 for a business lunch with a client.
20 Purchased gift-wrapping paper,$56.80.
21 Paid a courier $25 to deliver merchandise sold to a customer,terms FOB destination.
25 Paid $15.75 COD shipping charges on merchandise purchased for resale,terms FOB
shipping point.
27 Paid $83 for stamps,envelopes,and address lablels
30 Sorted the petty cash receipts by accounts affected and exchanged them for a check to
Both reimburse the fund for expenditures and decrease the amount of the fund to $400,There was $165.25 in the fund.
Required
(1) Prepare the journal entry to establish the petty cash fund.
(2)Prepare a petty cash payments report for April with these categories,delivery expense,entertainment expense,postage expense,merchandise inventory (transportation-in),and office supplies,Sort the payments into the appropriate categories and total the expenditures in each category.
(3)Prepare the journal entry to both reimburse and decrease the amount in the fund.
2.For each of these five separate cases,identify the principle of internal control that is violated,Recommend what the business should do to ensure adherence to principles of internal control.
(1)Jack McSweeny records all incoming customer cash receipts for his employer and writes off uncollectible accounts at year-end.
(2)At Tasty Foods,Bill and Betty work the cash registers and bag groceries,To alleviate the boredom they switch off between bagging and running the cash register every half hour,
(3)Marcia Ball does all the posting of accounts payable charges at the Provincial Motel,She prepares the accounts payable vouchers for payment,signs the vouchers,and wirtes the checks.
(4)Melissa Hancock prides herself on hiring quality workers who require little supervision,She sees no reason to to insult her best cashier by requiring approval signatures on such small amounts as petty cash disbursements and replenishment,
(5)Homer Scrooge has just calculated the total amount his business has paid in insurance premiums over the last ten years,His actaul insurance claims have only been 10% of the total paid,He decides to self-insure and save on premiums.
3.The following information is available to reconcile Wild Willy’s Whitewash Co,book balance of cash with its bank statement cash balance as of July 31,2005:
a. After all posting is complete on July 31,the company’s Cash account has a $13,805 debit balance,but its bank statement shows a $14,350 balance.
b. Checks outstanding total $4,180.
c. In comparing the canceled checks returned by the bank with the entries in the accounting records,it is found that Check No,2222 for July phone bill was correctly written and drawn for $720 but was erroneously entered in the accounting records as $270.
d. The bank charged Wild Willy’s $40 for a safe-deposit box,Wild Willy’s does not have a safe-deposit box.
e. A debit memorandum for $125 lists a $100 NSF check plus a $25 NSF charge,The check had been received from the Public Trust bank,Wild Willy has not yet recorded this check as NSF.
f. Enclosed with the statement is a $20 debit memorandum for bank services,It has not yet been recorded because no previous notification had been received.
g. The July 31 daily cash receipts of $3,000 were placed in the bank’s night depository on that date but do not appear on the July 31 bank statement.
Required
Preparation Component
(1)Prepare a bank reconciliation for this company as of July 31,2005.
(2)Prepare the journal entries necessary to bring the company’s book balance of cash into conformity with the reconciled cash balance as of July 31,2005.
4.Sheila and The Screamers most recently reconciled its bank statement and book balances of cash on August 31 and it showed two checks outstanding,No,6248 for $205 and No,6250 for $480,The following information is available for its September 30,2002,reconciliation:
From the September 30 Bank Statement
From Sheila’s Accounting Records
Cash Receipts Deposited
Cash
Date Debit
Sept. 5 300.00
13 450.00
18 7,200.00
19 960.00
30 1,200.00
_________
10,110.00
Cash Disbursements
Check Cash
No, Credit
6252 500.00
6253 220.00
6254 280.00
6255 1,200.00
6256 20.00
6257 970.00
6258 210.00
6259 40.00
6260 150.00
________
3,590.00
Cash Acct,No,101
Date Explanation PR Debit Credit Balance
Aug. 31 Balance 9,490.00
Sept.30 Total receipts R12 10,110.00 19,600.00
30 Total disbursements D23 3,590.00 16,010.00
Other Information
The bank statement shows an end of month balance of $17,750,Check No,6248 from last month did appear on this month’s bank statement but check No,6250 along with check No,6255 and No,6260 are still outstanding,The September 30 deposit of $1,200 does not appear on the bank statement,The bank statement showed that the band earned $50 of interest income during the month.
Check No,6258 is correctly drawn for $210 to pay for audio equipment; however,the recordkeeper misread the amount and entered it in the accounting records with a debit to Audio Equipment and a credit to Cash of $120,A $420 check shown received from a customer,M,Gordon,in payment of his account was returned NSF,Its return had not been recorded when the bank first notified the company,The bank statement showed the collection of a $1,600 note for the band by the bank,The bank deducted a $30 collection fee,The collection and fee are not yet recorded.
Required
Preparation Component
(1)Prepare the September 30,2002,bank reconciliation for this company.
(2)Prepare the journal entries to adjust the book balance of cash to the reconciled balance.
Analysis Component
(3)The bank statement reveals that some of the prenumbered checks in the sequence are missing,Describe three possible situations that could explain this.
