Chapter 7 Solutions - PRACTICE EXERCISES PE 71A 1 2 3(c...

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PRACTICE EXERCISES PE 7–1A 1. (c) monitoring 2. (a) the control environment 3. (b) control procedures PE 7–1B 1. (a) the control environment 2. (c) information and communication 3. (b) control procedures PE 7–2A Appears on the Bank Increases or Decreases Statement as a Debit the Balance of the Item No. or Credit Memo Company’s Bank Account 1 credit memo increases 2 credit memo increases 3 credit memo increases 4 debit memo decreases PE 7–2B Appears on the Bank Increases or Decreases Statement as a Debit the Balance of the Item No. or Credit Memo Company’s Bank Account 1 credit memo increases 2 debit memo decreases 3 credit memo increases 4 debit memo decreases
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PE 7–3A a. $14,680 as shown below. Bank section of reconciliation: $19,340 + $2,500 – $7,160 = $14,680 Company section of reconciliation: $6,480 + $8,250 – $50 = $14,680 b. Miscellaneous Expense ....................................... 50 Cash .................................................................. 50 Cash ....................................................................... 8,250 Notes Receivable ............................................ 8,000 Interest Revenue ............................................. 250 PE 7–3B a. $8,670 as shown below. Bank section of reconciliation: $11,200 + $1,650 – $4,180 = $8,670 Company section of reconciliation: $9,295 – $25 – $600 = $8,670 b. Accounts Receivable ........................................... 600 Miscellaneous Expense ....................................... 25 Cash .................................................................. 625 PE 7–4A a. Petty Cash ............................................................. 300 Cash .................................................................. 300 b. Store Supplies ...................................................... 120 Miscellaneous Selling Expense .......................... 75 Cash Short and Over ............................................ 10 Cash .................................................................. 205 PE 7–4B a. Petty Cash ............................................................. 500 Cash .................................................................. 500 b. Repairs Expense ................................................... 260 Miscellaneous Selling Expense .......................... 84 Cash Short and Over ............................................ 16 Cash .................................................................. 360
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EXERCISES Ex. 7–2 a. Disagree. Stealing is a serious issue. An employee who can justify taking a box of tea bags can probably justify “borrowing” cash from the cash register. b. Agree. Blake has made one employee responsible for the cash drawer in accordance with the internal control principle of assignment of responsibility. In addition, Blake has segregated the operations (preparing the orders) from the accounting (taking orders and payments). c. Disagree. It is commendable that Blake has given the employee a specific responsibility and is holding that employee accountable for it. However, after the cashier has counted the cash, another employee (or perhaps Blake) should remove the cash register tape and compare the amount on the tape with the cash in the drawer. Also, Blake’s standard of no mistakes may encourage the cashiers to overcharge a few customers in order to cover any possible shortages in the cash drawer. Ex. 7–3 a. The sales clerks could steal money by writing phony refunds and pocketing the cash supposedly refunded to these fictitious customers. b. Anasazi Earth Clothing suffers from inadequate separation of responsibilities for related operations since the clerks issue refunds and restock all merchandise. In addition, there is a lack of proofs and security measures since the supervisors authorize returns two hours after they are issued. c. A store credit for any merchandise returned without a receipt would reduce the possibility of theft of cash. In this case, a clerk could only issue a phony store credit rather than taking money from the cash register. A store credit is not as tempting as cash. In addition, sales clerks could only use a few store credits to purchase merchandise for themselves without management getting suspicious.
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