Chapter 6: Problem Set B

Problem 6-1B: Analyzing Internal Control (C1) 1. Case 1 (Tywin Company) o Internal Control Principle Violated: Maintain Adequate Records o Recommendation: Tywin should implement proper recordkeeping for its equipment. All assets, including equipment, should be tracked with detailed records, and periodic physical audits should be conducted. 2. Case 2 (Marker Theater) o Internal Control Principle Violated: Apply Technological Controls o Recommendation: Backups of critical systems should be done regularly (daily or weekly) rather than annually to protect against data loss in case of a system failure. 3. Case 3 (Sutton Company) o Internal Control Principle Violated: Divide Responsibility for Related Transactions o Recommendation: Sutton should separate duties so that the employee who places purchase orders does not also make payments. Payments should be authorized by a separate individual to ensure proper checks and balances. 4. Case 4 (Super Pharmacy) o Internal Control Principle Violated: Apply Technological Controls and Separate Recordkeeping from Custody of Assets o Recommendation: The check printing system should be passwordprotected, and access to the checks should be restricted to authorized personnel only. The office containing the printer and checks should be locked when unattended. 5. Case 5 (Lavina Company) o Internal Control Principle Violated: Perform Regular and Independent Reviews o Recommendation: External audits should not be canceled, as they are essential to ensure that internal controls are effective and to detect any potential issues. Lavina should reinstate the external audit. Problem 6-2B: Establishing, Reimbursing, and Adjusting Petty Cash (P2) 1. Journal Entry to Establish the Petty Cash Fund on January 3: plaintext Debit: Petty Cash Credit: Cash $150.00 $150.00 2. Journal Entry to Replenish the Petty Cash Fund on January 14: plaintext Debit: Office Supplies Expense Debit: Merchandise Inventory Debit: Repairs Expense Debit: Miscellaneous Expense Credit: Cash $14.29 $19.60 $38.57 $12.82 $87.72 3. Journal Entry to Increase the Petty Cash Fund on January 15: plaintext Debit: Petty Cash Credit: Cash $50.00 $50.00 4. Journal Entry to Replenish the Petty Cash Fund on January 31: plaintext Debit: Advertising Expense Debit: Postage Expense Debit: Delivery Expense Credit: Cash $50.00 $48.19 $78.00 $176.19 5. Journal Entry to Increase the Petty Cash Fund on January 31: plaintext Debit: Petty Cash Credit: Cash $50.00 $50.00 Problem 6-3B: Establishing, Reimbursing, and Increasing Petty Cash (P2) 1. Journal Entry to Establish the Petty Cash Fund: plaintext Debit: Petty Cash Credit: Cash 2. Petty Cash Payments Report for March: Expense Category Delivery Expense Mileage Expense Amount $10.75 $56.80 $250.00 $250.00 Expense Category Amount Postage Expense $18.00 Merchandise Inventory $57.60 Office Supplies Expense $46.32 Total $189.47 3. Journal Entry to Reimburse the Petty Cash Fund: plaintext Debit: Delivery Expense Debit: Mileage Expense Debit: Postage Expense Debit: Merchandise Inventory Debit: Office Supplies Expense Credit: Cash $10.75 $56.80 $18.00 $57.60 $46.32 $189.47 4. Journal Entry to Increase the Petty Cash Fund: plaintext Debit: Petty Cash Credit: Cash $50.00 $50.00 Problem 6-4B: Preparing a Bank Reconciliation and Recording Entries (P3) 1. Bank Reconciliation for Severino Co. (December 31): Bank Reconciliation Bank Book Bank balance as of December 31 $46,822.40 Add: Deposits in transit $9,583.10 Subtract: Outstanding checks: - Check No. 1242 ($410.40) ($410.40) - Check No. 1273 ($4,589.30) ($4,589.30) - Check No. 1282 ($400) ($400.00) Adjusted Bank Balance $51,005.80 Book balance as of December 31 $32,878.30 Add: Bank collection of note $18,980.00 Subtract: NSF check (Titus Industries) ($762.50) Subtract: Bank fee for check printing ($99.00) Correct check error (Check No. 1267) $9.00 Adjusted Book Balance $51,005.80 2. Journal Entries: o Bank collection of note: plaintext Debit: Cash Credit: Notes Receivable o NSF check (Titus Industries): plaintext Debit: Accounts Receivable Credit: Cash o $18,980.00 $18,980.00 $762.50 $762.50 Bank fee for check printing: plaintext Debit: Miscellaneous Expense Credit: Cash o $99.00 $99.00 Error correction (Check No. 1267): plaintext Debit: Cash $9.00 Credit: Office Supplies Expense $9.00 Problem 6-5B: Preparing a Bank Reconciliation and Recording Entries (P3) 1. Bank Reconciliation for Shamara Systems (May 31): Bank Reconciliation Bank Book Bank balance as of May 31 $22,071.50 Add: Deposits in transit $4,220.00 Subtract: Outstanding checks: - Check No. 1780 ($1,425.90) ($1,425.90) Adjusted Bank Balance $22,071.50 Book balance as of May 31 $22,100.00 Add: Error correction (Check No. 1788) $10.00 Subtract: NSF check (W. Sox) ($625.00) Add: Collection of note $7,350.00 Adjusted Book Balance $22,071.50 2. Journal Entries: o Error correction (Check No. 1788): plaintext Debit: Cash Credit: Utilities Expense o $10.00 $10.00 NSF check (W. Sox): plaintext Debit: Accounts Receivable Credit: Cash o $625.00 $625.00 Collection of note: plaintext Debit: Cash Credit: Notes Receivable $7,350.00 $7,350.00