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Chapter 7: Q17RQ (page 412)
Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?
To record the transactions into the accounts.
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This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas, Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers fill out the necessary tax forms, and he sent their documents to the home office. Work on the motel began on April 1 and ended September 1. Each week,Slim filled out a time card of hours worked by each employee during the week. Slim faxed the time cards to the home office, which prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the payroll checks, and returned to the construction site. At 5 p.m. on Friday, Slim distributed payroll checks to the workers.
Requirements
1. Describe in detail the main internal control weakness in this situation. Specify what negative result(s) could occur because of the internal control weakness.
2. Describe what you would do to correct the internal control weakness.
What are the steps taken to ensure control over purchases and payments by check?
Classifying bank reconciliation items
The following items could appear on a bank reconciliation:
a. Outstanding checks, \(670.
b. Deposits in transit, \)1,500.
c. NSF check from customer, no. 548, for \(175.
d. Bank collection of note receivable of \)800, and interest of \(80.
e. Interest earned on bank balance, \)20.
f. Service charge, \(10.
g. The business credited Cash for \)200. The correct amount was \(2,000.
h. The bank incorrectly decreased the business’s account by \)350 for a check written
by another business.
Classify each item as (1) an addition to the book balance, (2) a subtraction from the
book balance, (3) an addition to the bank balance, or (4) a subtraction from the bank
balance.
Defining internal control
Internal controls are designed to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate accounting records.
Requirements
1. Which objective do you think is most important?
2. Which objective do you think the internal controls must accomplish for the business to survive? Give your reason.
Preparing a bank reconciliation and journal entries
This problem continues the Crystal Clear Cleaning problem begun in Chapter 2 and
continued through Chapter 6.
In March 2019, Crystal Clear Cleaning opened a new checking account at First
Regional Bank. The bank statement dated March 31, 2019, for Crystal Clear
Cleaning follows:
Beginning Balance, March 1, 2019
Deposits and other credits:
Mar. 2
10
18
20
23 EFT Peg’s Restaurant(1)
(1) Peg’s Restaurant is a customer making a payment on account.
(3) Texas Energy is a utility provider.
(2) Check Art is a company that prints business checks (considered a
bank expense) for Crystal Clear Cleaning.
\(33,000
900
19,000
50,000
350
Checks and other debits:
Mar. 2 EFT to Check Art(2)
Ending balance, March 31, 2019
\) 0
31 Interest Revenue 50
5 Ck#235
9 Ck#237
9 Ck#236
26 Ck#239
10
2,400
1,500
2,900
2,000
28 EFT to Texas Energy(3) 130
29 Ck#240 300
31 Bank service charge 25
103,300
(9,265)
$ 94,035
Crystal Clear Cleaning’s Cash account in the general ledger shows the following
transactions for March:
Cash—First Regional Bank Checking Account
Balance
Deposit
Deposit
Deposit
Deposit
2,400
2,900
1,500
400
2,000
94,870
Mar. 2
10
18
20
31 Deposit
33,000
900
19,000
50,000
1,770
Mar. 2
4
5
10
21
Ck#235
Ck#236
Ck#237
Ck#238
Ck#239
300
300
23
29
Ck#240
Ck#241
Balance
Requirements
1. Prepare the bank reconciliation at March 31, 2019.
2. Journalize any required entries from the bank reconciliation. Post to the CashT-account to verify the balance of the account matches the adjusted book balancefrom the bank reconciliation.
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