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Chapter 7: Q-7-6TI (page 403)

Question: For each of the following items, determine whether the item would be:

a. added to the bank balance

b. subtracted from the bank balance

c. added to the book balance

d. subtracted from the book balance

11. Interest revenue earned

12. NSF check

13. Deposit in transit

14. Service charge

15. Outstanding check

Short Answer

Expert verified

Answer:

11)added to the book balance

12) subtracted from the book balance

13) added to the bank balance

14) subtracted from the book balance

15) subtracted from the bank balance

Step by step solution

01

Definition of outstanding check

Outstanding checks are those checks that are not presented for the payment.

02

Whether the item is added or subtracted

11. Interest revenue is revenue that increases the balance of the company. Hence, it is added to the book balance.

12. NSF check means checks that do not have sufficient balance in the account. Hence, these checks are deducted from the book balance.

13. Deposit in transit is the balance deposited into the bank but not recorded by the bank; hence, this amount is added to the bank balance.

14. Service charges are the charges collected by the bank hence, it deducted from the book balance as it is not recorded in book balance.

15. Outstanding check is the check that is issued but not presented for the payment. Outstanding checks are deducted from the bank balance.

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Most popular questions from this chapter

Identifying internal control weakness in cash receipts

Pendley Productions makes all sales on credit. Cash receipts arrive by mail. Larry

Chipello, the mailroom clerk, opens envelopes and separates the checks from the

accompanying remittance advices. Chipello forwards the checks to another employee,

who makes the daily bank deposit but has no access to the accounting records.

Chipello sends the remittance advices, which show cash received, to the accounting

department for entry in the accounts. Chipello’s only other duty is to grant sales

allowances to customers. (A sales allowancedecreases the customer’s account receivable.)

When Chipello receives a customer check for \(575 less a \)45 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?

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

  1. What was the key control weakness in this case?
  2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

Accounting for petty cash transactions

On September 1, Party Salad Dressings creates a little cash fund with an imprest

balance of \(600. During September, Michael Martell, the fund custodian, signs the

following petty cash tickets:

Petty Cash

Ticket Number Item Amount

101 Office supplies \) 60

102 Cab fare for executive 25

103 Delivery of package across town 45

104 Business dinner 55

105 Merchandise inventory 75

On September 30, prior to replenishment, the fund contains these tickets plus cash

of \(355. The accounts affected by petty cash payments are Office Supplies, Travel

Expense, Delivery Expense, Entertainment Expense, and Merchandise Inventory.

Requirements

1. Explain the characteristics and the internal control features of an imprest fund.

2. On September 30, how much cash should the petty cash fund hold before it isreplenished?

3. Journalize all required entries to create the fund and replenish it. Include explanations.

4. Make the October 1 entry to increase the fund balance to \)800. Include an explanationand briefly describe what the custodian does.

What are two common methods used when accepting deposits for credit card and debit card transactions?

Question: How does the Sarbanes-Oxley Act relate to internal controls?
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