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Chapter 2: Q1EI (page 117)

Better Days Ahead, a charitable organization, has a standing agreement with First National Bank. The agreement allows Better Days Ahead to overdraw its cash balance at the bank when donations are running low. In the past, Better Days Ahead managed funds wisely and rarely used this privilege. Jacob Henson has recently become the president of Better Days Ahead. To expand operations, Henson acquired office equipment and spent large amounts on fundraising. During Henson’s presidency, Better Days Ahead has maintained a negative bank balance of approximately $10,000.

What is the ethical issue in this situation, if any?

State why you approve or disapprove of Henson’s management of Better Days Ahead’s funds.

Short Answer

Expert verified

The decision is ethical if the bank allows and it is unethical when a bank does not allow for any overdraft. The decision will get approval only when gives consent and disapproval when a bank does not give approval.

Step by step solution

01

Ethical or not

This situation could be ethical or not; this depends on the clause of the bank determining the overdrafts. If the bank has the clause of agreeing to the overdrafts, then the decision of Mr. Henson is ethical.

If the bank allows overdraft only in the case of a crisis, then the decision of Mr. Henson will be unethical.

02

Approval or disapproval

If the bank allows the overdraft knowing that the business could deliver more income in the future, then the decisions are approved. If the bank does not approve, then decisions will get disapproval.

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Most popular questions from this chapter

Question:Preparing financial statements from the trial balance and calculating the debt ratio

Preparing financial statements from the trial balance and calculating the debt ratio

Account Title Debit Credit

Office Supplies 1,400

Cash 32,000

Accounts Receivable 9,100

Prepaid Insurance 2,600

Equipment 24,000

Accounts Payable 3,400

Unearned Revenue 1,296

Notes Payable 34,000

Common Stock 20,000

Dividends 3,000

Salaries Expense 1,600

Rent Expense 700

Utilities Expense 100

Service Revenue 15,804

Total Balance \( 74,500 \) 74,500

Requirements Prepare the balance sheet as of July 31, 2018.

Your friend, Dean McChesney, requested that you advise him on the effects that certain transactions will have on his business, A-Plus Travel Planners. Time is short, so you cannot journalize the transactions. Instead, you must analyze the transactions without a journal. McChesney will continue the business only if he can expect to earn a monthly net income of \(6,000. The business completed the following transactions during June:

a. McChesney deposited \)10,000 cash in a business bank account to start the company. The company issued common stock to McChesney.

b. Paid \(300 cash for office supplies.

c. Incurred advertising expense on account, \)700.

d. Paid the following cash expenses: administrative assistant’s salary, \(1,400; office rent, \)1,000.

e. Earned service revenue on account, \(8,800.

f. Collected cash from customers on account, \)1,200.

Requirements

2. Post the transactions directly to the accounts without using a journal. Record each transaction by letter. Calculate account balances.

Journalizing transactions, posting journal entries to T-accounts, and preparing a trial balance Victor Yang practices medicine under the business title Victor Yang, M.D. During March, the medical practice completed the following transactions:

Mar. 1 Yang contributed \(62,000 cash to the business in exchange for common stock.

5 Paid monthly rent on medical equipment, \)570.

9 Paid \(14,000 cash to purchase land to be used in operations.

10 Purchased office supplies on account, \)1,500.

19 Borrowed \(27,000 from the bank for business use.

22 Paid \)1,400 on account.

28 The business received a bill for advertising in the daily newspaper to be paid in April, \(220.

31 Revenues earned during the month included \)6,700 cash and \(5,800 on account.

31 Paid employees’ salaries \)2,100, office rent \(1,500, and utilities \)350. Record as a compound entry.

31 The business received \(1,000 for medical screening services to be performed next month.

31 Paid cash dividends of \)7,100.

The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Land; Accounts Payable; Advertising Payable; Unearned Revenue; Notes Payable; Common Stock; Dividends; Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; and Advertising Expense.

Requirements 2. Post the journal entries to the T-accounts, using transaction dates as posting references in the ledger accounts. Label the balance of each account Bal.

Question: Correcting errors in a trial balance

The following trial balance of Joy McDowell Tutoring Service as of May 31, 2018, does not balance.

Account Title Office Supplies Cash Debit Credit Accounts Receivable Computer Equipment Accounts Payable Utilities Payable Common Stock Dividends Service Revenue Salaries Expense Utilities Expense Rent Expense Total Balance \( 33,100 11,600 \) 11,100 9,600 800 \( 2,800 \) 35,000 1,900 800 700 2,000 600 15,800 10,400

Investigation of the accounting records reveals that the bookkeeper:

a. Recorded a \(400 cash revenue transaction by debiting Accounts Receivable. The credit entry was correct.

b. Posted a \)2,000 credit to Accounts Payable as \(200.

c. Did not record Utilities Expense or the related Utilities Payable in the amount of \)300.

d. Understated Common Stock by $100.

Prepare the corrected trial balance as of May 31, 2018, complete with a heading; journal entries are not required.

Question:Preparing financial statements from the trial balance and calculating the debt ratio

Preparing financial statements from the trial balance and calculating the debt ratio

Account Title Debit Credit

Office Supplies 1,400

Cash 32,000

Accounts Receivable 9,100

Prepaid Insurance 2,600

Equipment 24,000

Accounts Payable 3,400

Unearned Revenue 1,296

Notes Payable 34,000

Common Stock 20,000

Dividends 3,000

Salaries Expense 1,600

Rent Expense 700

Utilities Expense 100

Service Revenue 15,804

Total Balance \( 74,500 \) 74,500

Requirements 2. Prepare the statement of retained earnings for the month ended July 31, 2018. The beginning balance of retained earnings was $0.
See all solutions

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