Problem Set Session 4: Chapters 7 and 8

Name: Windy Martaputri

NIM: 1901806211
Class: LOA5 / Batch 15 Jakarta, Date : 17 Desember 2018

PART I — MULTIPLE CHOICE (30 points)

Instructions: Designate the best answer for each of the following questions.

A 1. Which of the following represent the three classifications of receivables?

a. Accounts receivable, notes receivable, and other receivables
b. Accounts to be collected, accounts estimated that will not be collected, accounts that
were not collected
c. Receivables that are recognized, receivables that are valued, receivables that are
accelerated
d. Interest-related receivables, receivables from customers, receivables from
employees/officers

A 2. Days of Slumber sells mattress for cash and on credit. At the end of 2014, the following
appeared in the company’s balance sheet:
Accounts receivable, net of $2,460 allowance……………………$166,200
Which one of the following statements for Days of Slumber is correct?
a. Customers owe $168,660 to Days of Slumber
b. Days of Slumber expects to collect $163,470 from customers.
c. Days of Slumber wrote off $2,460 of uncollectible accounts during 2014.
d. The net realizable value of Days of Slumber’s accounts receivable totals $163,740.

D 3. Which of the following is not an element of fraud in a business environment?

a. Financial pressure
b. Rationalization
c. Opportunity
d. Risk assessment

C 4. Which of the following is one reason that companies estimate uncollectible accounts?
a. To identify which customers’ accounts will become uncollectible
b. To write off the amounts which will not be collected from customers
c. To match the expense associated with receivables against the related revenues
d. To determine the total amount owed by customers
PS4-2 Problem Set 4

A 5. Which of the following is a basic principle of cash management?

a. Increase the speed of receivables collection
b. Keep inventory levels high
c. Maintain a high cash balance for unanticipated emergencies
d. Defer the timing of major expenditures

B 6. Which one of the following is not an objective of internal control?

a. To ensure compliance with laws and regulations
b. To guarantee the accuracy of the accounting records
c. To enhance the reliability of financial statements
d. To safeguard assets

C 7. Which one of the following is provided by the cash budget?

a. It can indicate the profitability of a company.
b. It can identify projected expenses.
c. It can identify when a company will need additional financing.
d. It can identify if a company has adequate internal controls.

A 8. Which of the following items may cause the cash balance per bank to differ from the cash
balance per books?
a. Time lags and bank errors
b. Bank errors and the existence of multiple bank accounts
c. Time lags and the existence of multiple bank accounts
d. Existence of amounts not yet paid by customers and time lags

C 9. Which of the following items is not considered to be a cash equivalent?

a. Short-term highly liquid investments maturing in 30 days
b. Commercial paper
c. Restricted cash funds
d. Money market funds

B 10. Which one of the following is not a reason that a company may sell it receivables?
a. The amount due from customers is relatively large compared to other assets owned by
a company.
b. A company determines it will be unable to collect all amounts due from
customers.
c. Selling receivables is a reasonable source of cash, often less costly than loans.
d. Billing and collecting amounts due from customers is time-consuming and costly.
 Problem Set 4 PS4-3

PART II — INTERNAL CONTROL OVER CASH RECEIPTS AND DISBURSEMENTS (12 points)
Six internal control principles related to cash transactions are discussed in the textbook. These
principles, with code letters, are:

Code Internal Control Principle

A Establishment of responsibility
B Segregation of duties
C Documentation procedures
D Physical controls
E Independent internal verification
F Human resource controls

Instructions: Match the above principles to the following applications related to cash receipts and
cash disbursements by placing the code in the space provided. Each code letter can be used once,
more than once, or not at all.

B 1. The duties of approving an item for payment and paying the item should be performed
by different individuals.
C 2. Cash register tapes should be used for over-the-counter receipts.

E 3. Each check should be compared with approved invoices before being issued.

A 4. Only the treasurer should be authorized to sign checks.

F 5. All personnel who handle cash should be bonded.

C 6. All checks should be prenumbered.

C 7. After payment, an invoice should be stamped “PAID.”

D 8. Blank checks should be stored in a safe, and access should be restricted.

E 9. Daily cash counts should be made by cashier department supervisors.

A 10. Only designated personnel should be authorized to handle and have access to cash
receipts.

B 11. The duties of receiving and recording cash should be assigned to different individuals.

D 12. Small bills and coins on hand to resupply cash registers should be kept in a safe.
PS4-4 Problem Set 4

PART III — BANK RECONCILIATION WITH ENTRIES (18 points)

Alykhan Industries provided the following information for the month of February.

1. Balance per bank on February 28—$31,080

2. Balance per books on February 28—$32,210
3. Total outstanding checks at February 28—$2,100
4. Debit memoranda:
a. NSF check from Sanderson, Inc.—$450
b. Printing company checks—$20
c. Electronic payment to bank for a loan—$2,220. Of this amount, $90 is interest.
5. Credit memorandum: EFT from customer for $1,450
6. A check written this month to City Utilities and cleared the bank at the correct amount of
$1,790, but was recorded at $1,870.
7. The bank charged a $270 check of ABC Company against Alykhan Industries’ account.
8. Deposit in transit on February 28—$1,800
Instructions
A. Prepare a bank reconciliation in proper format.

ALYKHAN INDUSTRIES
Bank Reconciliation
February 28

Cash balance per bank statement $ 31.080

Add :
Deposit in transit 1.800
Bank Error Charges 270 2.070
$ 33.150
Less : Outstanding checks (2.100)
Adjusted cash balance per bank $ 31.050

Cash balance per books $ 32.210

Add : EFT from customer 1.450
Error in recording check to City Utilities 80 1.530
$ 33.740
Less : NSF Check (450)
Printing company checks (20)
Electronic payment bank loan (2.220) (2.690)
Adjusted cash balance per books $ 31.050
B. Record the necessary journal entries for the month of February for Alykhan Industries.

a. Debit memoranda: NSF check from Sanderson, Inc.—$450

Journal to record NSF :
Account Receivable – Sanderson, Inc 450
Cash 450

b. Debit memoranda: Printing company checks—$20

Journal to record charge for printing company checks (DM) :
Miscellaneous Expense 20
Cash 20

c. Debit memoranda: Electronic payment to bank for a loan—$2,220. Of this amount, $90 is
interest.
Journal to record payment bank loan & interest :
Notes Payable 2.130
Interest Expense 90
Cash 2.220

d. Credit memorandum: EFT from customer for $1,450

Journal to record EFT :
Cash 1.450
Account Receivable 1.450

e. Book error : A check written this month to City Utilities and cleared the bank at the correct
amount of $1,790, but was recorded at $1,870.
Journal to record book error :
Cash 80
Utilities Expense 80
S4-6 Problem Set 4

PART IV — CASH BUDGET (11 points)

The following estimated information is available for Advanced Motors for the month of October:

Cash receipts from customers $71,200

Payments for inventory 21,500
Payments for salaries 10,400
Receipt of interest on investments 800
Cash payments of income taxes 7,800
Cash payments of administrative expenses 11,000
Dividends to be paid 14,000
Capital expenditures 8,000
Depreciation expense 4,200

The cash balance at September 30 is $4,300. Management wishes to maintain a minimum cash
balance of $4,000.

Instructions
Prepare a basic cash budget for the month of October.

ADVANCED MOTORS
Cash Budget
October xxxx

Beginning cash balance 4.300

Add – Cash Receipt :
Cash receipts from customers 71.200
Receipt of interest on investments 800 72.000
Total Available Cash 76.300
Less – Cash Disbursement :
Payments for inventory 21.500
Payments for salaries 10.400
Cash payments of income taxes 7.800
Cash payments of administrative expenses 11.000
Dividends to be paid 14.000
Capital expenditures 8.000 72.700
Excess (deficiency) of available cash over cash disbursements 3.600

Financing
Add – Borrowings 400
Less – Repayments 0
Ending cash balance 4.000
 Problem Set 4 PS4-7

PART V — ACCOUNTS RECEIVABLE (20 points)

1. ACCOUNTS RECEIVABLE—UNCOLLECTIBLE ACCOUNTS

Instructions: Present the journal entries specified below. Show supporting calculations. Each
……………………………………item should be considered independently.

The trial balance of Priority Paints at December 31, 2014, includes the following:
Debits Credits
Accounts Receivable ............................................................... $94,000
Allowance for Doubtful Accounts ............................................. 500
Sales (all on credit) .................................................................. $550,000

A. If Priority Paints uses the aging method and estimates that $2,200 of receivables will be
uncollectible, prepare the adjusting entry.
Allowance for Doubtfull Accounts *) Adjustment Amount :
$ 2.200 + $ 500 = $ 2.700
31/12 500
2.700 Adjust *)
2.200 31/12

Journal for adjusting entry – uncollectible receivables :

Bad Debt Expense 2.700
Allowance for Doubtful Accounts 2.700
B. If Priority Paints estimates uncollectibles at 2.2% of accounts receivable and the
allowance account had a $500 credit balance instead of a $500 debit balance, prepare
the appropriate adjusting entry.
Allowance for Doubtfull Accounts 1) 2,2% x $ 94.000 = $ 2.068
2) $ 2.068 - $ 500 = $ 1.568
500 31/12
2.700 Adjust 2)
1)
2.068 31/12

Journal for adjusting entry – uncollectible receivables :

Bad Debt Expense 1.568
Allowance for Doubtful Accounts 1.568
C. Assume that on February 3, 2015, the specific account of George Bush with a balance of
$320 is deemed uncollectible. Record the write-off.
Journal for adjusting entry – uncollectible receivables :
Allowance for doubtful accounts 320
Account Receivable 320
D. Assume that on May 4, 2015, George Bush pays the above balance in full. Record the
appropriate entries.
Journal for recovery an uncollectible account :
Account Receivable 320
Allowance for doubtful accounts 320
Cash 320
Account Receivable 320
PS4-8 Problem Set 4

2. SALE OF ACCOUNTS RECEIVABLE

Instructions: Present the journal entries specified below.

A. Hardy Lumber Company sells $150,000 of accounts receivable to Buyout Factors Inc. for
cash less a 2.5% service charge. Record the sale.
Journal – sale of receivables to a factor :
Cash 146.250
Service charge expense (2,5% x $150.000) 3.750
Account receivable 150.000

B. Hardy Lumber Company sold merchandise for $4,200 and accepted the customer’s VISA
card. VISA charges a 3.5% service charge. Record the sale.
Journal – record visa credit card sales :
Cash 4.053
Service charge expense (3,5% x $4.200) 147
Sales revenue 4.200

PART VI — NOTES RECEIVABLE (9 points)

Instructions: Prepare journal entries to record the following events. Round amounts to the
nearest whole dollar:

June 1 Hanalia Collision received a 5%, 4-month $5,000 note dated June 1 from a customer for
the balance due.

Sept.30 The note is honored and no interest has been accrued previously.

If Hanalia Collision has a fiscal year end at June 30, how much is the net realizable value of the
note on that date?

Journal Entries
June 1 – recognizing notes receivable :
Notes receivable $ 5.000
Account receivable $ 5.000

Sept 30 – honor of notes receivable & no interest has been accrued :

Cash $ 5.083
Notes receivable $ 5.000
Interest Revenue (4/12 x 5% x $ 5.000) 83

Net realizable value

NRV = Principal + Interest
= $ 5.000 + (1/12 x 5% x $ 5.000)
= $ 5.000 + $ 21
NRV = $ 5.021