BLC AIS 100 Exam 2 Review- Answers

1. All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act of 2002
except:
a. independent outside auditors must attest to the level of internal control.
b. companies must develop sound internal controls over financial reporting.
c. companies must continually assess the functionality of internal controls.
d. independent outside auditors must eliminate redundant internal control.

2. Internal controls are not designed to safeguard assets from

a. natural disasters.
b. employee theft.
c. robbery.
d. unauthorized use.

3. An accounts payable clerk also has access to the approved supplier master file for purchases. The control
principle of
a. establishment of responsibility is violated.
b. independent internal verification is violated.
c. documentation procedures is violated.
d. separation of duties is violated.

4. An employee authorized to sign checks should not record

a. owner cash contributions.
b. mail receipts.
c. cash disbursement transactions.
d. sales transactions.

5. If a check correctly written and paid by the bank for $626 is incorrectly recorded on the company's books for
$662, the appropriate treatment on the bank reconciliation would be to
a. add $36 to the book's balance.
b. subtract $36 from the book's balance.
c. deduct $36 from the bank's balance.
d. deduct $626 from the book's balance.

6. The matching principle

a. requires that all credit losses be recorded when an individual customer cannot pay.
b. necessitates the recording of an estimated amount for bad debts.
c. results in the recording of a known amount for bad debt losses.
d. is not involved in the decision of when to expense a credit loss.

7. Under the allowance method, when a specific account is written off

a. total assets will be unchanged.
b. net income will decrease.
c. total assets will decrease.
d. total assets will increase.

8. In 2010 Wilkinson Company had net credit sales of $1,125,000. On January 1, 2010, Allowance for Doubtful
Accounts had a credit balance of $27,000. During 2010, $45,000 of uncollectible accounts receivable were
written off. Past experience indicates that the allowance should be 10% of the balance in receivables (percentage
of receivables basis). If the accounts receivable balance at December 31 was $300,000, what is the required
adjustment to the Allowance for Doubtful Accounts at December 31, 2010?
 a. $ 30,000
b. $112,500
c. $ 48,000
d. $ 45,000

9. The interest on a $3,000, 9%, 90-day note receivable is

a. $67.50.
b. $270.00.
c. $22.50.
d. $45.00.

10. Arnold Company purchases a new delivery truck for $35,000. The sales taxes are $2,000. The logo of the
company is painted on the side of the truck for $1,200. The truck’s annual license is $120. The truck undergoes
safety testing for $220. What does Arnold record as the cost of the new truck?
a. $38,540.
b. $38,420.
c. $37,000.
d. $38,200.

11. Equipment was purchased for $60,000. Freight charges amounted to $2,800 and there was a cost of $8,000
for building a foundation and installing the equipment. It is estimated that the equipment will have a $12,000
salvage value at the end of its 5-year useful life. Depreciation expense each year using the straight-line method
will be
a. $14,160.
b. $11,760.
c. $9,840.
d. $9,600.

12. A plant asset was purchased on January 1 for $40,000 with an estimated salvage value of $8,000 at the end
of its useful life. The current year's Depreciation Expense is $4,000 calculated on the straight-line basis and the
balance of the Accumulated Depreciation account at the end of the year is $20,000. The remaining useful life of
the plant asset is
a. 10 years.
b. 8 years.
c. 5 years.
d. 3 years.

13. A company sells a plant asset that originally cost $180,000 for $60,000 on December 31, 2010. The
accumulated depreciation account had a balance of $90,000 after the current year's depreciation of $15,000 had
been recorded. The company should recognize a
a. $30,000 loss on disposal.
b. $30,000 gain on disposal.
c. $60,000 loss on disposal.
d. $60,000 gain on disposal.

14. The cost of an intangible asset with an indefinite life should

a. be amortized over 20 years.
b. be amortized over the life of the creator plus 70 years.
c. not be amortized.
d. none of the above.
15. Unearned Rental Revenue is
a. a contra account to Rental Revenue.
b. a revenue account.
c. reported as a current liability.
d. debited when rent is received in advance.

16. The following totals for the month of April were taken from the payroll register of Noll Company.

Salaries and Wages Expense $24,000

FICA taxes withheld 1,100
Income taxes withheld 5,000
Medical insurance deductions 900
Federal unemployment taxes 64
State unemployment taxes 432

The entry to record the payment of net payroll would include a

a. debit to Salaries Payable for $16,504.
b. debit to Salaries Payable for $17,000.
c. debit to Salaries Payable for $15,900.
d. credit to Cash for $18,100.

17. Bonds that may be exchanged for common stock at the option of the bondholders are called
a. options.
b. stock bonds.
c. convertible bonds.
d. callable bonds.

18. The carrying value of bonds will equal the market price
a. at the close of every trading day.
b. at the end of the fiscal period.
c. on the date of issuance.
d. every six months on the date interest is paid.

19. On January 1, Weatherholt Inc. issued $3,000,000, 9% bonds for $2,817,000. The market rate of interest for
these bonds is 10%. Interest is payable annually on December 31. Jean Loptein uses the effective-interest
method of amortizing bond discount. At the end of the first year, Weatherholt should report unamortized bond
discount of
a. $164,700.
b. $171,300.
c. $154,830.
d. $153,000.

20. DangeRuss Company is considering an investment, which will return a lump sum of $675,000 four years
from now. Below is some of the time value of money information that DangeRuss has compiled that might help
in planning compounded interest decisions.
Present value of 1 for 4 periods at 10% 0.68301
Future value of 1 for 4 periods at 10% 1.46410
Present value of an annuity of 1 for 4 periods at 10% 3.16986
Future value of an annuity of 1 for 4 periods at 10% 4.64100
To the closest dollar, what amount should DangeRuss Company pay for this investment to earn a 10% return?
a. $405,000
b. $270,000
c. $461,032
d. $534,914

Problem 1
Fraud experts often say that there are three primary factors that contribute to employee fraud. Identify the three
factors and explain what is meant by each.

The three main factors that contribute to employee fraud are opportunity, financial pressure, and
rationalization. Opportunities that an employee can take advantage of occur when the workplace lacks
sufficient controls to deter and detect fraud. Financial pressure occurs when employees want to lead a
lifestyle that they cannot afford on their current salary. Rationalization involves employees justifying
fraud because they believe they are underpaid while their employer is making lots of money.

Problem 2
Jim Gant has worked for Dr. Ken Flood for several years. Jim demonstrates a loyalty that is rare among
employees. He hasn't taken a vacation in the last three years. One of Jim's primary duties at the medical office is
to open the mail and list the checks received. He also takes cash from patients at the cashier window as patients
leave. At times it is so hectic that Jim doesn't bother with giving patients a receipt for the cash paid on their
accounts. He assures them he will see to it that they receive the proper credit. When the traffic is slow in the
office Jim offers to help Lisa post the payments to the patients' accounts receivable. She is always happy to
receive his help, because he is a very conscientious worker.

Instructions
Identify any principles of internal control that may be violated in this medical office situation.

1. It is Lisa's responsibility to post payments to patient accounts. In allowing Jim to assist her, the
establishment of responsibility principle is violated.
2. Although it appears to be a small office, it is not appropriate that Jim both opens the mail,
receives and records cash receipts from patients, and also appears to have custody of cash. This
situation violates the segregation of duties principle. By posting to patients' accounts it would be
possible to post credits to patient accounts and pocket the cash.
3. The documentation principle is violated when patients are not given cash receipts. Although many
professional offices do not have cash registers, computerized or manual receipts are customary and
necessary.

4. Independent internal verification is also being violated. There is no independent counting of the cash
and comparison to total receipts.
5. Human resource controls are being violated. There is no mention of Jim being bonded. Also,
personnel should be required to take vacations.

Problem 3

The cash balance per books for Wellmeyer Company on November 30, 2010, is $10,740.93. The following
checks and receipts were recorded for the month of December 2010:

Checks Receipts
No. Amount No. Amount Amount Date
17 $372.96 22 $ 578.84 $ 843.86 12/5
18 780.62 23 1,687.50 941.54 12/21
19 157.00 24 921.30 808.58 12/27
20 587.50 25 246.03 967.00 12/31
21 234.15

In addition, the bank statement for the month of December is presented below:

Balance Deposits and Credits Checks and Debits Balance

Last Statement No. Total Amount No. Total Amount This Statement

$5,404.84 5 $9,178.36 10 $3,632.19 $10,951.01

__________________________________________________________________________________

Checks and other debits Deposits Date Balance

______________________________________________

No. Amount No. Amount No. Amount

__________________________________________________________________________________

14 148.29 17 372.96 22 578.84 5,484.38 12/1 $9,875.13

18 708.62 24 921.30 843.86 12/8 $9,219.03
19 157.00 25 246.03 941.54 12/23 $9,541.58
21 234.15 15.00 SC 808.58 12/29 $10,101.01
250.00 NSF 1,100.00 CM 12/31 $10,951.01
__________________________________________________________________________________

Symbols: NSF (Not sufficient funds) SC (Service charge) CM (Credit Memo)

Check No. 18 was correctly written for $708.62 for a payment on account. The NSF check was from S. Gill, a
customer, in settlement of an account receivable. An entry has not been made for the NSF check. The credit
memo is for the collection of a note receivable including interest of $60 that has not been accrued. The bank
service charge is $15.00.

Instructions
(a) Prepare a bank reconciliation at December 31.
(b) Prepare the adjusting journal entries required by the bank reconciliation.

(a) WELLMEYER COMPANY

Bank Reconciliation
December 31, 2010

Cash balance per bank statement ................................................. $10,951.01

Add: Deposits in transit ............................................................... 967.00
11,918.01
Less: Outstanding checks
No. 20 ....................................................................... $ 587.50
No. 23 ....................................................................... 1,687.50 2,275.00
Adjusted cash balance per bank ................................................... $ 9,643.01

Cash balance per books ................................................................. $ 8,736.01*

Add: Error in recording check No. 18 ........................................ $ 72.00
Note collected by bank ($1,040 principal plus $60 interest)........ 1,100.00 1,172.00
9,908.01
Less: Bank service charge ............................................................ 15.00
 NSF check ........................................................................... 250.00 265.00
Adjusted cash balance per books .................................................. $ 9,643.01

*11/30 balance per books + Receipts – Checks written = 12/31 balance per books
$10,740.93 + $3,560.98 – $5,565.90 = $8,736.01

(b) Dec. 31 Cash .................................................................................72.00

Accounts Payable ........................................................ 72.00
(To correct recording error on check No. 18)

31 Cash ................................................................................. 1,100.00

Notes Receivable ......................................................... 1,040.00
Interest Revenue ......................................................... 60.00
(To record collection of note and interest)

31 Miscellaneous Expense ........................................................ 15.00

Cash ............................................................................. 15.00
(To record bank service charge for the month
of December)
31 Accounts Receivable—S. Gill 250.00
Cash ............................................................................. 250.00
(To record NSF check)

Problem 4
At December 31, 2010, the trial balance of Stine Company contained the following amounts before adjustment.
Debits Credits
Accounts Receivable $500,000
Allowance for Doubtful $4,800
Accounts
Sales 2,200,000

Instructions
a) Based on the information given, which method of accounting for bad debts is Stine Company using? How can
you tell?

b) Prepare the adjusting entry at December 31, 2010, for bad debts expense assuming that the aging schedule
indicates that $21,000 of accounts receivable will be uncollected.

c) Repeat part (b) assuming that instead of a credit balance there is a $4,800 debit balance in the Allowance for
Doubtful Accounts.

d) During the next month, January 2011, a $5,000 account receivable is written off as uncollectible. Prepare the
journal entry to record the write-off.

e) Repeat part (d) assuming that Stine uses the direct write-off method instead of the allowance method in
accounting for the uncollectible accounts receivable.

f) What type of account is the allowance for doubtful accounts? How does it affect how accounts receivable is
reported on the balance sheet at the end of the accounting period?

(a) The allowance method is being used by Stine. Since the balance in the allowance for doubtful accounts
is given, it must be using this method because the account would not exist if it were using the direct write-
off method.
(b) Dec. 31 Bad Debts Expense ($21,000 – $4,800) ..... 16,200
Allowance for Doubtful Accounts ........ 16,200

(c) Dec. 31 Bad Debts Expense ($21,000 + $4,800) ..... 25,800

Allowance for Doubtful Accounts ........ 25,800

(d) Allowance for Doubtful Accounts.................................. 5,000

Accounts Receivable .................................................……….5,000

(e) Bad Debts Expense..........................................................5,000

Accounts Receivable ................................................. 5,000

(f) The allowance for doubtful accounts is a contra-asset account. It is subtracted from the gross amount
of accounts receivable so that accounts receivable is reported at its cash realizable value.

Problem 5
In 2012, Lebron James Company had net credit sales of $8,675,309 for the year. It had a beginning accounts
receivable (net) balance of $282,012 and an ending accounts receivable (net) balance of $409,009. Compute
Lebron James Company’s (a) receivables turnover and (b) average collection period in days.

(a) $8,675,309 / ((282,012 + 409,009) / 2) = 25.11

(b) 365 / 25.11 = 14.54

Problem 6
Kinney Company purchased a truck for $57,000. The company expected the truck to last four years or 100,000
miles, with an estimated residual value of $6,000 at the end of that time. During the second year the truck was
driven 27,000 miles. Compute the depreciation for the second year under each of the methods below and place
your answers in the blanks provided.

Units-of-activity $ 13,770
[($57,000 – $6,000) ÷ 100,000] × 27,000 = $13,770)

Double-declining-balance $14,250
(year 1— [$57,000 × (1 ÷ 4 × 2)] = $28,500)
(year 2— [($57,000 – $28,500) × (1 ÷ 4 × 2)] = $14,250)

Problem 7
Prepare the journal entries to record the following transactions for Reese Company, which has a calendar year
end and uses the straight-line method of depreciation.

(a) On September 30, 2010, the company sold old delivery equipment for $27,000. The delivery equipment
was purchased on January 1, 2008, for $57,000 and was estimated to have a $12,000 salvage value at the end of
its 5-year life. Depreciation on the delivery equipment has been recorded through December 31, 2009.
(b) On June 30, 2010, the company sold old office equipment for $24,000. The office equipment originally
cost $36,000 and had accumulated depreciation to the date of disposal of $15,000.

(a) September 30, 2010

Depreciation Expense 6,750
Accumulated Depreciation—Delivery Equipment 6,750
(To record depreciation expense for the first 9 months of 2010. $45,000 ÷ 5 years = $9,000 × 9/12 = $6,750)

Cash 27,000
Accumulated Depreciation—Delivery Equipment ($18,000 + $6,750) 24,750
Loss on Disposal ($32,250 – $27,000) 5,250
Delivery Equipment 57,000
(To record sale of delivery equipment at a loss)

(b) June 30, 2010

Cash 24,000
Accumulated Depreciation—Office Equipment 15,000
Office Equipment 36,000
Gain on Disposal ($24,000 – $21,000) 3,000
(To record sale of office equipment at a gain)

Problem 8
Moon Company issued $300,000, 10%, 5-year bonds on January 1, 2010, at 106. Interest is payable annually on
January 1. Moon uses the effective-interest method of amortization and has a calendar year end and the bonds
were issued for an effective interest rate of 8%.

Instructions
Prepare all journal entries made in 2010 related to the bond issue and interest expense for the first period.

Jan. 1 Cash 318,000

Bonds Payable 300,000
Premium on Bonds Payable 18,000

Dec. 31 Bond Interest Expense 25,440

Premium on Bonds Payable 4,560
Bond Interest Payable 30,000
($318,000 × 8% = $25,440)
($300,000 × 10% = $30,000)
($30,000 – $25,440 = $4,560)

Problem 9
Presented below are two independent situations:

(a) Morten Corporation purchased $160,000 of its bonds on June 30, 2010, at 102 and immediately retired
them. The carrying value of the bonds on the retirement date was $143,700. The bonds pay annual interest and
the interest payment due on June 30, 2010, has been made and recorded.

(b) McEvoy, Inc., purchased $220,000 of its bonds at 96 on June 30, 2010, and immediately retired them.
The carrying value of the bonds on the retirement date was $214,000. The bonds pay annual interest and the
interest payment due on June 30, 2010, has been made and recorded.
Instructions
For each of the independent situations, prepare the journal entry to record the retirement or conversion of the
bonds.

(a) June 30 Bonds Payable ..................................................................... 160,000

Loss on Bond Redemption ................................................. 19,500
Discount on Bonds Payable .................................... 16,300
Cash .......................................................................... 163,200
($160,000 – $143,700 = $16,300)
($160,000 × 1.02 = $163,200)

(b) June 30 Bonds Payable ..................................................................... 220,000

Discount on Bonds Payable .................................... 6,000
Gain on Bond Redemption ..................................... 2,800
Cash .......................................................................... 211,200
($220,000 – $214,000 = $6,000)
($220,000 × 96% = $211,200)

Problem 10

Wild & R.D. Enterprises issued 10%, 6-year, $5,000,000 par value bonds that pay interest semiannually on
October 1 and April 1. The bonds are dates April 1, 2012 and are issued on that date. The discount rate of
interest for such bonds on April 1, 2012 is 8%. What cash proceeds did Wild & R.D. Z receive from issuance of
the bonds? Is the bond issued at a premium or discount? Why?

Present value of principal to be received at maturity:

$5,000,000 * 0.62460 (PV of $1 due in 12 periods
at 4% from Table 3) =………………………………………………………... $3,123,000.00
Present value of interest to be received periodically
over the term of the bonds: $250,000 * 9.38507
(PV of $1 due each period for 12 periods at 4% from Table 4)=………….$2,346,267.50
Present value of bonds and cash proceeds……………………………………………$5,469,267.50

Notice, the cash proceeds are greater than $5,000,000 because the bond is issued at a premium due to the
fact that the coupon rate (10%) is greater than the market rate (8%)

Problem 11

Bonds may be redeemed (retired) before maturity by the issuing corporation. Explain why a company would
decide to retire bonds before maturity and the necessary steps to record the redemption.

A company may decide to retire bonds before maturity to reduce interest cost and remove debt from its
balance sheet. A company will retire debt early only if it has sufficient cash resources.

When bonds are retired before maturity, it is necessary to eliminate the carrying value of the bonds at the
redemption date and recognize a gain or loss on redemption. The gain or loss is the difference between the
cash paid and the carrying value of the bonds.
Problem 12
Tom purchased an investment for $9,818.15. From this investment, he will receive $1,000 annually for the next
20 years starting one year from now. What rate of interest will Kenny be earning on his investment?
Use present value of an annuity of 1 table data.
Answer: 8%
($9,818.15 ÷ $1,000) = 9.81815 Read across the 20-period row in present value of an annuity of 1 to find
9.81815 in the 8% column.

Problem 13
Appalachian Company is considering purchasing equipment. The equipment will produce the following cash
flows: Year 1, $50,000; Year 2, $60,000; Year 3, $75,000. Appalachian requires a minimum rate of return of
10%. What is the maximum price Appalachian should pay for this equipment?

To determine the present value of the future cash flows, discount the future cash flows at 10%, using
present value of 1 table data.

Year 1 ($50,000  0.90909) = $45,454.50

Year 2 ($60,000  0.82645) = 49,587.00
Year 3 ($75,000  0.75132) = 56,349.00
Present value of future cash flows $151,390.50
To achieve a minimum rate of return of 10%, Appalachian Company should pay no more than
$151,390.50. If Appalachian pays less than $151,390.50 its rate of return will be greater than 10%.

Problem 14 **NOT NECESSARY – DO NOT NEED TO KNOW STRAIGHT LINE AMORTIZATION

OF PREMIUMS AND DISCOUNTS
B1G Company sold $2,500,000, 8%, 25-year bonds on January 1, 2014. The bonds were dated January 1, 2014,
and pay interest on January 1. B1G Company uses the straight-line method to amortize bond premium or
discount.
(a) Prepare all the necessary journal entries to record the issuance of the bonds and bond interest expense for
2014, assuming that the bonds sold at 102.
Jan. 1 Cash ($2,500,000 X 102%)...................................... 2,550,000
Bonds Payable............................................... 2,500,000
Premium on Bonds Payable......................... 50,000

Dec. 31 Interest Expense...................................................... 198,000

Premium on Bonds Payable
($50,000 ÷ 25)...................................................... 2,000
Interest Payable
($2,500,000 X 8%).................................... 200,000
(b) Prepare journal entries as in part (a) assuming that the bonds sold at 96.
Jan. 1 Cash ($2,500,000 X 96%)........................................ 2,400,000
Discount on Bonds Payable..................................... 100,000
Bonds Payable............................................... 2,500,000

Dec. 31 Interest Expense...................................................... 204,000

 Interest Payable
($2,500,000 X 8%).................................... 200,000
Discount on Bonds
Payable ($100,000 ÷ 25)........................... 4,000

(c) Show the balance sheet presentation for the bond issue at December 31, 2014, using (1) the 102 selling
price, and then (2) the 96 selling price.

Premium
Current Liabilities
Interest payable.................................................................... $ 200,000
Long-term Liabilities
Bonds payable, due 2039...................................................... $2,500,000
Add: Premium on bonds payable...................................... 48,000 2,548,000

Discount
Current Liabilities
Interest payable.................................................................... $ 200,000
Long-term Liabilities
Bonds payable, due 2039...................................................... $2,500,000
Less: Discount on bonds payable........................................ 96,000 2,404,000

Problem 15
Electric Avenue sold $5,000,000, 9%, 10-year bonds on January 1, 2014. The bonds were dated January 1 and
pay interest on January 1. The bonds were sold at 103.
(a) Prepare the journal entry to record the issuance of the bonds on January 1, 2014.

Jan. 1 Cash ($5,000,000 X 103%) 5,150,000*

Bonds Payable 5,000,000
Premium on Bonds
Payable 150,000

(b) At December 31, 2014, $15,000 of the bond premium had been amortized. Show the long-term liability
balance sheet presentation of the bond liability at December 31, 2014.

Long-term Liabilities
Bonds payable, due 2024 $5,000,000
Add: Premium on bonds payable 135,000 $5,135,000

(c) At January 1, 2016, when the carrying value of the bonds was $5,120,000, the company redeemed the bonds
at 104. Record the redemption of the bonds assuming that interest for the year had already been paid.

Dec. 31 Bonds Payable 5,000,000

Premium on Bonds Payable 120,000
Loss on Bond Redemption
($5,120,000 – $5,200,000) 80,000
 Cash ($5,000,000 X 104%) 5,200,000

Problem 16
At December 31, 2013, RB Dance Craze Corporation reported these plant assets.

Land $4,000,000
Buildings $28,800,000
Less: Accumulated Depreciation 11,520,000 17,280,000
- Buildings
Equipment 48,000,000
Less: Accumulated Depreciation 5,000,000 43,000,000
– Equipment
Total plant assets $64,280,000

During 2014, the following selected cash transactions occurred.

April 1: Purchased land for $2,600,000.
May 1: Sold equipment that cost $750,000 when purchased on January 1, 2009. The equipment was sold for
$367,000
June 1: Sold land purchased on June 1, 2002, for $2,000,000. The land cost $800,000.
Sept. 1: Purchased equipment for $840,000.
Dec. 31: Retired equipment that cost $470,000 when purchased on December 31, 2004. No salvage value was
received.
Instructions
(a) Journalize the transactions. RB Dance Craze uses straight-line depreciation for buildings and equipment.
The buildings are estimated to have a 40-year life and no salvage value; the equipment is estimated to
have a 10-year useful life and no salvage value. Update depreciation on assets disposed of at the time of
sale or retirement.

April 1 Land 2,600,000

Cash 2,600,000

May 1 Depreciation Expense 25,000

Accumulated Depreciation—

Equipment 25,000

($750,000 X 1/10 X 4/12)

1 Accumulated Depreciation—

Equipment 400,000

Cash 367,000

Equipment 750,000
 Gain on Disposal of Plant

Assets 17,000

June 1 Cash 2,000,000

Gain on Disposal of Plant

Assets 1,200,000

Land 800,000

Sept. 1 Equipment 840,000

Cash 840,000

Dec. 31 Depreciation Expense 47,000

Accumulated Depreciation—

Equipment ($470,000 X 1/10) 47,000

31 Accumulated Depreciation—

Equipment 470,000

Equipment 470,000

(b) Record adjusting entries for depreciation for 2014.

Dec. 31 Depreciation Expense 720,000

Accumulated Depreciation—

Buildings ($28,800,000 X 1/40) 720,000

31 Depreciation Expense 4,706,000

Accumulated Depreciation—

Equipment 4,706,000
 (c) Prepare the plant assets section of RB Dance Craze’s balance sheet at December 31, 2014.

RB Dance Craze Corporation

Partial Balance Sheet
December 31, 2014

Plant Assets*
Land.................................................................................... $ 5,800,000
Buildings............................................................................. $28,800,000
Less: Accumulated depreciation—
buildings............................................................. 12,240,000 16,560,000
Equipment.......................................................................... 47,620,000
Less: Accumulated depreciation—
equipment........................................................... 8,908,000 38,712,000
Total plant assets....................................................... $61,072,000

Problem 17
The following control procedures are used at Feliz Company for over-the-counter cash receipts.

1. All over-the-counter receipts are registered by four clerks who use a cash register with a single cash drawer
(till).

2. To minimize the risk of robbery, cash in excess of $200 is stored in an unlocked drawer in a desk in the back
room.

3. Each clerk counts his/her own receipts at the end of the day and reconciles that amount to the cash register
total.

4. A bookkeeper prepares a journal entry to record the day’s cash receipts, then deposits the receipts in the bank.

5. To save funds, cashiers do not get vacation days.

Instructions

(a) For each procedure, explain the weakness in internal control, and identify the control principle that is
violated.

(b) For each weakness, suggest a change in procedure that will result in good internal control.
(a) (b)
Principle Recommended
Procedure Weakness Violated Change

1. Inability to Establishment There should be

establish of responsibility. separate cash
responsibility drawers and
for cash with register codes
a specific clerk. for each clerk.
 2. Cash is not Physical controls. Cash should be
adequately protected stored in a safe
from theft. until it is deposited
in bank.

Principle Recommended
Procedure Weakness Violated Change

3. Cash is not Independent A cashier office

independently internal supervisor should
counted. verification. count cash.

4. The bookkeeper/ Segregation The cashier’s

accountant of duties. department should
should not make the deposits.
handle cash.

5. Cashiers do not Human resource All cashiers should

take vacations. controls. either take vacations or be
rotated to other jobs and shifts.

Problem 18
(a) Using the four steps in the reconciliation procedure described on page 35, prepare a bank reconciliation at
December 31, 2014.

(b) Prepare the adjusting entries based on the reconciliation. (Note: The correction of any errors pertaining to
recording checks should be made to Accounts Payable. The correction of any errors relating to recording cash
receipts should be made to Accounts Receivable.)
a) CARLIN COMPANY
Bank Reconciliation
December 31, 2014

Cash balance per bank statement.............................................. $18,988.40

Add: Deposits in transit............................................................ 1,190.40
20,178.80
Less: Outstanding checks
No. 3471................................................................... $ 844.50
No. 3474................................................................... 1,050.00
No. 3478................................................................... 538.20
No. 3481................................................................... 807.40
No. 3483................................................................... 1,340.00
 No. 3486................................................................... 1,389.50 5,969.60
Adjusted cash balance per bank................................................. $14,209.20

Cash balance per books............................................................... $12,513.30

Add: Note collected by bank
($2,500 + $160 – $15)............................................... 2,645.00
15,158.30
Less: NSF check.......................................................................... $ 819.10
Error in recording check No. 3485............................. 90.00*
Error in 12-16 deposit
($2,672.70 – $2,632.70)............................................ 40.00 949.10
Adjusted cash balance per books............................................... $14,209.20

(b) Dec. 31 Cash ................................................................... 2,645.00

Miscellaneous Expense........................................ 15.00
Notes Receivable....................................... 2,500.00
Interest Revenue....................................... 160.00

31 Accounts Receivable—
K. Webster.......................................................... 819.10
Cash........................................................... 819.10

31 Accounts Payable................................................ 90.00

Cash........................................................... 90.00

31 Accounts Receivable............................................ 40.00

Cash........................................................... 40.00

Problem 19
The following represents selected information taken from a company’s aging schedule to estimate uncollectible
accounts receivable at year-end.

(a) Calculate the total estimated bad debts based on the above information.
Total estimated bad debts
 Number of Days Outstanding
Total 0–30 31–60 61–90 91–120 Over 120
Accounts
receivable $285,000 $107,000 $60,000 $50,000 $38,000 $30,000
% uncollectible 2% 5% 7.5% 10% 14%
Estimated
bad debts $16,890 $2,140 $3,000 $3,750 $3,800 $4,200

(b) Prepare the year-end adjusting journal entry to record the bad debts using the allowance method and the aged
uncollectible accounts receivable determined in (a).

Assume the unadjusted balance in the Allowance for Doubtful Accounts account is a $7,000 credit.

Bad Debt Expense .........................................................................9,890

Allowance for Doubtful Accounts
[$16,890 – $7,000].................................................................... 9,890

(c) Of the above accounts, $2,600 is determined to be specifically uncollectible. Prepare the journal entry to
write off the uncollectible accounts.
Allowance for Doubtful Accounts.................................................................. 2,600
Accounts Receivable.................................................................. 2,600

(d) The company subsequently collects $1,200 on a specific account that had previously been determined to be
uncollectible in (c). Prepare the journal entry(ies) necessary to restore the account and record the cash collection.
Accounts Receivable....................................................................................... 1,200
Allowance for Doubtful Accounts............................................. 1,200
Cash ..................................................................................................... 1,200
Accounts Receivable.................................................................. 1,200

(e) Explain how establishing an allowance account satisfies the expense recognition principle.
When an allowance account is used, an adjusting journal entry is made at the end of each accounting
period. This entry satisfies the expense recognition principle by recording the bad debts expense in the
period in which the sales occur.