Chapter 7: Q10RQ (page 411)
What are the steps taken to ensure control over purchases and payments by check?
Control over purchases and payments by checks includes three different steps.
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Levon Helm was a kind of one-person mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started “borrowing” from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time, and Helm lost everything
Requirements
Preparing a bank reconciliation
The Cash account of Guard Dog Security Systems reported a balance of \(2,540 at December 31, 2018. There were outstanding checks totaling \)400 and a December 31 deposit in transit of \(100. The bank statement, which came from Park Cities Bank, listed the December 31 balance of \)3,340. Included in the bank balance was a collection of \(510 on account from Brendan Ballou, a Guard Dog customer who pays the bank directly. The bank statement also shows a \)30 service charge and $20 of interest revenue that Guard Dog earned on its bank balance. Prepare Guard Dog’s bank reconciliation for December 31.
Journalizing petty cash
Prepare the journal entries for the following petty cash transactions of Everly Gaming
Supplies:
March 1 Established a petty cash fund with a \(250 balance.
31 The petty cash fund has \)24 in cash and \(235 in petty cash tickets
that were issued to pay for Office Supplies (\)35) and Entertainment
Expense (\(200). Replenished the fund and recorded the expenditures.
April 15 Increased the balance of the petty cash fund to \)300.
Preparing a bank reconciliation and journal entries
The August 31 bank statement of Well Healthcare has just arrived from United Bank.
To prepare the bank reconciliation, you gather the following data:
a. The August 31 bank balance is \(4,540.
b. The bank statement includes two charges for NSF checks from customers. One is
for \)380 (#1), and the other is for \(180 (#2).
c. The following Well Healthcare checks are outstanding at August 31:
Check No. Amount
237 \) 80
288 190
291 570
294 600
295 30
296 70
d. Well collects from a few customers by EFT. The August bank statement lists a
\(1,200 EFT deposit for a collection on account.
e. The bank statement includes two special deposits that Well hasn’t recorded yet:
\)800 for dividend revenue, and \(120 for the interest revenue Well earned on its
bank balance during August.
f. The bank statement lists a \)50 subtraction for the bank service charge.
g. On August 31, the Well treasurer deposited \(260, but this deposit does not appear
on the bank statement.
h. The bank statement includes a \)1,050 deduction for a check drawn by Multi-State
Freight Company. Well notified the bank of this bank error.
i. Well’s Cash account shows a balance of $2,800 on August 31.
Requirements
1. Prepare the bank reconciliation for Well Healthcare at August 31, 2018.
2. Journalize any required entries from the bank reconciliation. Include anexplanation for each entry.
How do businesses control cash receipts by mail?
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