Learning Materials
Features
Discover
Chapter 7: Q1RQ (page 411)
What is internal control?
Internal control refers to the plans or rulesimplemented by the business entities to promote the efficiency of business operationsand prevent fraud.
Over 30 million students worldwide already upgrade their learning with Vaia!
All the tools & learning materials you need for study success - in one app.
Get started for free
Accounting for petty cash transactions
Suppose that on September 1, Cool Gyrations, a disc jockey service, create a petty
cash fund with an imprest balance of \(350. During September, Ruth Mangan, fund
custodian, signs the following petty cash tickets:
Petty Cash
Ticket Number Item Amount
1 Postage for package received \) 25
2 Office party 10
3 Two boxes of stationery 20
4 Printer cartridges 15
5 Business dinner 65
On September 30, prior to replenishment, the fund contains these tickets plus cash of
\(210. The accounts affected by petty cash payments are Office Supplies, Entertainment
Expense, and Postage Expense.
Requirements
1. On September 30, how much cash should this petty cash fund hold before it is
replenished?
2. Journalize all required entries to (a) create the fund and (b) replenish it. Include
explanations.
3. Make the entry on October 1 to increase the fund balance to \)425. Include an
Explanation
Preparing a bank reconciliation and journal entries
The October 31 bank statement of Wyndham’s Healthcare has just arrived from State
Bank. To prepare the bank reconciliation, you gather the following data:
a. The October 31 bank balance is \(6,290.
b. The bank statement includes two charges for NSF checks from customers. One is
for \)370 (#1), and the other is for \(180 (#2).
c. The following Wyndham’s checks are outstanding at October 31:
Check No. Amount
237 \) 120
288 140
291 570
294 570
295 30
296 110
d. Wyndham’s collects from a few customers by EFT. The October bank statement
lists a \(2,200 EFT deposit for a collection on account.
e. The bank statement includes two special deposits that Wyndham’s hasn’t recorded
yet: \)900 for dividend revenue and \(100 for the interest revenue Wyndham’s
earned on its bank balance during October.
f. The bank statement lists a \)80 subtraction for the bank service charge.
g. On October 31, the Wyndham’s treasurer deposited \(270, but this deposit does
does not appear on the bank statement.
h. The bank statement includes a \)750 deduction for a check drawn by Multi-State
Freight Company. Wyndham’s notified the bank of this bank error.
i. Wyndham’s Cash account shows a balance of $3,200 on October 31.
Requirements
1. Prepare the bank reconciliation for Wyndham’s Healthcare at October 31, 2018.
2. Journalize any required entries from the bank reconciliation. Include an explanation for each entry.
The following petty cash transactions of Green Golf Equipment occurred in May:
May 1 Established a petty cash fund with a \(200 balance.
31 The petty cash fund has \)18 in cash and \(180 in petty cash tickets that were issued to pay for Office Supplies(\)81), Delivery Expense (\(36), Postage Expense (\)54), and Miscellaneous Expense ($9).
The petty cash custodianreplenished the fund and recorded the expenses.
Prepare the journal entries.
Correcting internal control weaknesses
Each of the following situations has an internal control weakness.
a. Upside-Down Applications develops custom programs to customers’ specifications.
Recently, development of a new program stopped while the programmers
redesigned Upside-Down’s accounting system. Upside-Down’s accountants could
have performed this task.
b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling
and accounting duties. Norma just purchased a new luxury car and a new
home in an expensive suburb. As owner of the company, you wonder how she
can afford these luxuries because you pay her only $30,000 a year and she has no
source of outside income.
c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order
to get an important loan. The loan went through, but Izzie later went bankrupt and
could not repay the bank.
d. The office supply company where Pet Grooming Goods purchases sales receipts
recently notified Pet Grooming Goods that its documents were not prenumbered.
Howard Mustro, the owner, replied that he never uses receipt numbers.
e. Discount stores such as Cusco make most of their sales in cash, with the remainder
in credit card sales. To reduce expenses, one store manager ceases purchasing
fidelity bonds on the cashiers.
f. Cornelius’s Corndogs keeps all cash receipts in an empty box for a week because
the owner likes to go to the bank on Tuesdays when Joann is working.
Requirements
1. Identify the missing internal control characteristics in each situation.
2. Identify the possible problem caused by each control weakness.
3. Propose a solution to each internal control problem.
Preparing a bank reconciliation and journal entries
The December cash records of Davidson Insurance follow:
Davidson’s Cash account shows a balance of \(17,450 at December 31. On December
31, Davidson Insurance received the following bank statement:
Additional data for the bank reconciliation follow:
a. The EFT credit was a receipt of rent. The EFT debit was an insurance payment.
b. The NSF check was received from a customer.
c. The \)1,400 bank collection was for a note receivable.
d. The correct amount of check no. 1419, for rent expense, is \(1,930. Davidson’s
controller mistakenly recorded the check for \)1,390.
Requirements
1. Prepare the bank reconciliation of Davidson Insurance at December 31, 2018.
2. Journalize any required entries from the bank reconciliation.
What do you think about this solution?
We value your feedback to improve our textbook solutions.
Explanations 
Textbooks 
Exams 
GCSE 
IGCSE 
AS 
A Level 
International A Level 
University Admissions Tests 
Flashcards 
Vaia AI 
Notes 
Study Plans 
Study Sets 
Find a job 
Find a degree 
Student Deals 
Magazine 
Mobile App