Q:

As the manager of the accounts receivable department for Beavis Leather Goods, Ltd., you
recently noticed that Kelly Collins, your accounts receivable clerk who is paid
$1,200 per month, has been wearing unusually tasteful and expensive clothing. (This is Beavis’s
first year in business.) This morning, Collins drove up to work in a brand new Lexus.
Naturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance
of $192,000 as shown in the ledger. The following information is available for your first year
(precisely 9 months ended September 30, 2012) in business.
(1) Collections from customers $188,000
(2) Merchandise purchased 360,000
(3) Ending merchandise inventory 90,000

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(4) Goods are marked to sell at 40% above cost.

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Instructions

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Assuming all sales were made on account, compute the ending accounts receivable balance that
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should appear in the ledger, noting any apparent shortage. Then, draft a memo dated October 3,
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2012, to Mark Price, the branch manager, explaining the facts in this situation. Remember that
this problem is serious, and you do not want to make hasty accusations.
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A:
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To: Mark Price, Branch Manager

From:Accounting Major
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Date: October 3, 2012

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Subject:Discrepancy in the Accounts Receivable Account

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 While performing a routine test on accounts receivable balances today, I discovered a $2,000
shortage. I believe that this matter deserves your immediate attention.

To compute the shortage, I determined that the accounts receivable balance should have been
based on the amount of inventory which has been sold. When we opened for business this year,
we purchased $360,000 worth of merchandise inventory, and this morning, the balance in this
account was $90,000.

The $270,000 difference plus the 40% markup indicates that sales on account totaled $378,000
[$270,000 + ($270,000 X .40)] to date. I subtracted the payments of $188,000 made on account
this year and calculated the ending balance to be $190,000. However, the ledger shows a balance

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of $192,000.

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o.
I realize that this situation is very sensitive and that we should not accuse any one individual
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without further evidence. However, in order to protect the company’s assets, we must begin an
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immediate investigation of this disparity.
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Aside from me, the only other employee who has access to the accounts receivable ledger is
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Kelly Collins, the receivables clerk. I will supervise Collins more closely in the future but
suggest that we also employ an auditor to check into this situation.
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