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Chapter 7: Q4SE (page 412)

Applying internal control over cash payments by check

A purchasing agent for Franklin Office Supplies receives the goods that he purchases

and also approves payment for the goods.

Requirements

1. How could this purchasing agent cheat his company?

2. How could Franklin avoid this internal control weakness?

Short Answer

Expert verified

The separation of duties avoids weaknesses.

Step by step solution

01

Definition of control overpayment by check

Control overpayment by check is the control that controls the payments made by check.

02

The purchasing agent cheats the company

The purchasing agent can cheat the company by making more amount of payments than the number of goods purchased.

03

Internal control weakness

This internal control weakness can be controlled by separating the duties.

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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?

Why is it necessary to record journal entries after the bank reconciliation has been prepared? Which side of the bank reconciliation requires journal entries?

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.

How do businesses control cash receipts over the counter?

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
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