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Internal Control and Bank Reconciliations.

1. For each of the following items, indicate whether its amount (i) affects the bank or book side of a bank reconciliation and (ii) represents an addition or a subtraction in a bank reconciliation:

a. Outstanding checks
b. Debit memos
c. NSF checks
d. Unrecorded deposits
e. Interest on cash balance
f. Credit memos
g. Bank service charges

2. Which of the items in part 1 require an adjusting journal entry?

Exercise 8-3

Bemis Company is a rapidly growing start-up business. Its record keeper, who was hired one year ago, left town after the company's manager discovered that a large sum of money had disappeared over the past six months. An audit disclosed that the record keeper had written and signed several checks made payable to her fiance and then recorded the checks as salaries expense. The fiance, who cashed the checks but never worked for the company, left town with the record keeper. As a result, the company incurred an uninsured loss of $84,000. Evaluate Bemis's internal control system and indicate which principles of internal control appear to have been ignored.

Exercise 8-4

Gannon Company establishes a $400 petty cash fund on September 9. On September 30, the fund shows $166 in cash along with receipts for the following expenditures: transportation-in, $32; postage expenses, $113; and miscellaneous expenses, $87. The petty cashier could not account for a $2 shortage in the fund. Gannon uses the perpetual system in accounting for merchandise inventory. Prepare (1) the September 9 entry to establish the fund and (2) the September 30 entry to both reimburse the fund and reduce it to $300.

Solution Preview

QS 8-6

1. For each of the following items, indicate whether its amount (i) affects the bank or book side of
a bank reconciliation and (ii) represents an addition or a subtraction in a bank reconciliation:

a. Outstanding checks - bank side, addition
b. Debit memos - book side, subtraction
c. NSF checks - book side, subtraction
d. Unrecorded deposits - bank side, addition
e. Interest on cash balance - book side, addition
f. Credit memos - book side, addition
g. Bank service charges - book side, subtraction

2. Which of the items in part 1 require an adjusting journal entry?

Journal entries must be prepared for the adjustments to the balance per books, hence: Debit memos, NSF checks, Interest on cash balance, Credit memos, Bank service ...

Solution Summary

The solution discussion internal control and bank reconciliations.

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