Chapter 7: Q711SE (page 414)
Computing the cash ratio Smythe Banners reported the following figures in its financial statements:
Cash $ 26,500 Cash Equivalents 5,000 Total Current Liabilities 30,000 Compute the cash ratio for Smythe Banners.
The current ratio is 1.05:1ss
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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.
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
Identifying internal control weakness in cash receipts
Seawind Productions makes all sales on credit. Cash receipts arrive by mail. Justin
Broadway, the mailroom clerk, opens envelopes and separates the checks from
the accompanying remittance advices. Broadway forwards the checks to another
employee, who makes the daily bank deposit but has no access to the accounting
records. Broadway sends the remittance advices, which show cash received, to
the accounting department for entry in the accounts. Broadway’s only other duty
is to grant sales allowances to customers. (A sales allowancedecreases the customer’s
account receivable.) When Broadway receives a customer check for \(600 less a
\)30 allowance, he records the sales allowance and forwards the document to the
accounting department.
Requirements
1. Identify the internal control weakness in this situation.
2. Who should record sales allowances?
3. What is the amount that should be shown in the ledger for cash receipts?
Evaluating internal control over cash payments Gary’s Great Cars purchases high-performance auto parts from a Nebraska vendor. Dave Simon, the accountant for Gary’s, verifies receipt of merchandise and then prepares, signs, and mails the check to the vendor.
Requirements
1. Identify the internal control weakness over cash payments.
2. What could the business do to correct the weakness?
Preparing a bank reconciliation and journal entries
This problem continues the Canyon Canoe Company situation from Chapter 6.
Canyon Canoe Company has decided to open a new checking account at River
Nations Bank during March 2019. Canyon Canoe Company’s March Cash T-account
for the new cash account from its general ledger is as follows:
Cash—River Nations Bank Checking Account
Balance
Deposit
Deposit
Deposit
Deposit
200
4,300
750
1,675
1,500
14,165
Mar. 1
2
13
20
27
Deposit
10,000
2,325
2,750
4,500
31 3,490
Mar. 2
4
9
14
21
Ck#101
Ck#102
Ck#103
Ck#104
Ck#105
175
300
28
30
Ck#106
Ck#107
Balance
Canyon Canoe Company’s bank statement dated March 31, 2019, follows:
Beginning Balance, March 1, 2019
Deposits and other credits:
Mar. 2
14
21
28
29 EFT Sport Shirts(1)
(1) Sport Shirts is a customer making a payment on account.
(2) Bank Checks is a company that prints business checks (considered
a bank expense) for Canyon Canoe Company
\(10,000
2,325
2,750
4,500
500
Checks and other debits:
Mar. 2 EFT to Bank Checks(2)
Ending balance, March 31, 2019
\) 0
31 Interest Revenue 45
3 Ck#101
6 Ck#102
15 Ck#104
16 Ck#103
55
200
4,300
1,675
750
28 EFT to Rivers Energy(3) 270
29 Ck#106 175
31 Bank service charge 70
20,120
(7,495)
$ 12,625
(3) Rivers Energy is a utility provider.
Requirements
1. Prepare the bank reconciliation at March 31, 2019.
2. Journalize any transactions required from the bank reconciliation.
3. Compute the adjusted account balance for the Cash T-account, and denote thebalance as End. Bal. Does the adjusted balance of the Cash T-account match theadjusted book balance on the bank reconciliation?
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