Question 1 (6-1A):
For each of these five separate cases, identify the principle(s) of internal control that is violated. Recommend what the business should do to ensure adherence to principles of internal control.
- Heather Flat records all incoming customer cash receipts for her employer and posts the customer payments to their respective accounts.
- At Netco Company, Jeff and Jose alternate lunch hours. Jeff is the petty cash custodian, but if someone needs petty cash when he is at lunch, Jose fills in as custodian.
- Nadine Cox posts all patient charges and payments at the Dole Medical Clinic. Each night Nadine backs up the computerized accounting system to a tape and stores the tape in a locked file at her desk.
- Barto Sayles prides himself on hiring quality workers who require little supervision. As office manager, Barto gives his employees full discretion over their tasks and for years has seen no reason to perform independent reviews of their work.
- Desi West's manager has told her to reduce costs. Desi decides to raise the deductible on the plant's property insurance from $5,000 to $10,000. This cuts the property insurance premium in half. In a related move, she decides that bonding the plant's employees is a waste of money since the company has not experienced any losses due to employee theft. Desi saves the entire amount of the bonding insurance premium by dropping the bonding insurance.
Please select just one principle that indicates the primary violation per item.
Question 2 (6-4A):
Prepare a bank reconciliation and record adjustments:
The following information is available to reconcile Clark Company's book balance of cash with its bank statement cash balance as of July 31, 2011.
- On July 31, the company's Cash account has a $26,193 debit balance, but its July bank statement shows a $28,020 cash balance.
- Check No. 3031 for $1,380 and Check No. 3040 for $552 were outstanding on the June 30 bank reconciliation. Check No. 3040 is listed with the July canceled checks, but Check No. 3031 is not. Also, Check No. 3065 for $336 and Check No. 3069 for $2,148, both written in July, are not among the canceled checks on the July 31 statement.
- In comparing the canceled checks on the bank statement with the entries in the accounting records, it is found that Check No. 3056 for July rent was correctly written and drawn for $1,250 but was erroneously entered in the accounting records as $1,230.
- A credit memorandum enclosed with the July bank statement indicates the bank collected $9,000 cash on a non-interest-bearing note for Clark, deducted a $45 collection fee, and credited the remainder to its account. Clark had not recorded this event before receiving the statement.
- A debit memorandum for $805 lists a $795 NSF check plus a $10 NSF charge. The check had been received from a customer, Jim Shaw. Clark has not yet recorded this check as NSF.
- Enclosed with the July statement is a $15 debit memorandum for bank services. It has not yet been recorded because no previous notification had been received.
- Clark's July 31 daily cash receipts of $10,152 were placed in the bank's night depository on that date, but do not appear on the July 31 bank statement.
- Prepare the bank reconciliation for this company as of July 31, 2011.
- Prepare the journal entries necessary to bring the company's book balance of cash into conformity with the reconciled cash balance as of July 31, 2011.
- Assume that the July 31, 2011, bank reconciliation for this company is prepared and some items are treated incorrectly. For each of the following errors, explain the effect of the error on (i) the adjusted bank statement cash balance and (ii) the adjusted cash account book balance.
- The company's unadjusted cash account balance of $26,193 is listed on the reconciliation as $26,139.
- The bank's collection of the $9,000 note less the $45 collection fee is added to the bank statement cash balance on the reconciliation.
Question 3 (9-2A):
Warranty expense and liability estimation:
On October 29, 2010, Lue Co. began operations by purchasing razors for resale. Lue uses the perpetual inventory method. The razors have a 90-day warranty that requires the company to replace any nonworking razor. When a razor is returned, the company discards it and mails a new one from Merchandise Inventory to the customer. The company's cost per new razor is $18 and its retail selling price is $80 in both 2010 and 2011. The manufacturer has advised the company to expect warranty costs to equal 7% of dollar sales. The following transactions and events occurred.
-Nov 11: Sold 75 razors for $6,000 cash
30: Recognized warranty expense related to November sales with an adjusting entry
-Dec 9: Replaced 15 razors that were returned under the warranty
16: Sold 210 razors for $16,800 cash
29: Replaced 30 razors that were returned under the warranty
31: Recognized warranty expense related to December sales with an adjusting entry
-Jan 5: Sold 130 razors for $10,400 cash
17: Replaced 50 razors that were returned under the warranty
31: Recognized warranty expense related to January sales with an adjusting entry
- Prepare journal entries to record these transactions and adjustments for 2010 and 2011.
- How much warranty expense is reported for November 2010 and for December 2010?
- How much warranty expense is reported for January 2011?
- What is the balance of the Estimated Warranty Liability account as of December 31, 2010?
- What is the balance of the Estimated Warranty Liability account as of January 31, 2011?
Question 4 (9-5A):
Entries for payroll transactions:
On January 8, the end of the first weekly pay period of the year, Royal Company's payroll register showed that its employees earned $11,380 of office salaries and $32,920 of sales salaries. Withholdings from the employees' salaries include FICA Social Security taxes at the rate of 6.2%, FICA Medicare taxes at the rate of 1.45%, $6,340 of federal income taxes, $670 of medical insurance deductions, and $420 of union dues. No employee earned more than $7,000 in this first period.
- Calculate FICA Social Security taxes payable and FICA Medicare taxes payable. Prepare the journal entry to record Royal Company's January 8 (employee) payroll expenses and liabilities.
- Prepare the journal entry to record Royal's (employer) payroll taxes resulting from the January 8 payroll. Royal's merit rating reduces its state unemployment tax rate to 4% of the first $7,000 paid each employee. The federal unemployment tax rate is 0.8%.
Question 5 (8-1A):
Plant asset costs; depreciation methods:
Xavier Construction negotiates a lump-sum purchase of several assets from a company that is going out of business. The purchase is completed on January 1, 2011, at a total cash price of $787,500 for a building, land, land improvements, and four vehicles. The estimated market values of the assets are building, $408,000; land, $289,000; land improvements, $42,500; and four vehicles, $110,500. The company's fiscal year ends on December 31.
- Prepare a table to allocate the lump-sum purchase price to the separate assets purchased (round percents to the nearest 1%). Prepare the journal entry to record the purchase.
- Compute the depreciation expense for year 2011 on the building using the straight-line method, assuming a 15-year life and a $25,650 salvage value.
- Compute the depreciation expense for year 2011 on the land improvements assuming a five-year life and double-declining-balance depreciation.
Question 6 (8-7A):
On July 23 of the current year, Dakota Mining Co. pays $4,836,000 for land estimated to contain 7,800,000 tons of recoverable ore. It installs machinery costing $390,000 that has a 10-year life and no salvage value and is capable of mining the ore deposit in eight years. The machinery is paid for on July 25, seven days before mining operations begin. The company removes and sells 400,000 tons of ore during its first five months of operations ending on December 31. Depreciation of the machinery is in proportion to the mine's depletion as the machinery will be abandoned after the ore is mined.
Prepare entries to record (a) the purchase of the land, (b) the cost and installation of machinery, (c) the first five months' depletion assuming the land has a net salvage value of zero after the ore is mined, and (d) the first five months' depreciation on the machinery.
Describe both the similarities and differences in amortization, depletion, and depreciation.
Question 7 (10-1A):
Computing bond price and recording issuance:
(Round dollar amounts to the nearest whole dollar. Assume no reversing entries are used.)
Stowers Research issues bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds have a $20,000 par value and an annual contract rate of 10%, and they mature in 10 years.
For each of the following three separate situations, (a) determine the bonds' issue price on January 1, 2011, and (b) prepare the journal entry to record their issuance:
- The market rate at the date of issuance is 8%.
- The market rate at the date of issuance is 10%.
- The market rate at the date of issuance is 12%.
Question 8 (10-2A):
Straight-line amortization of bond discount:
Heathrow issues $2,000,000 of 6%, 15-year bonds dated January 1, 2011, that pay interest semiannually on June 30 and December 31. The bonds are issued at a price of $1,728,224.\
- Prepare the January 1, 2011, journal entry to record the bonds' issuance.
- For each semiannual period, compute (a) the cash payment, (b) the straight-line discount amortization, and (c) the bond interest expense.
- Determine the total bond interest expense to be recognized over the bonds' life.
- Prepare the first two years of an amortization table using the straight-line method.
- Prepare the journal entries to record the first two interest payments.