CHAPTER 7 ALTERNATE PROBLEMS Problem 7.

1A
Bank Reconciliation The cash transactions and cash balances of Flagg, Inc., for August were as follows: 1. The ledger account for Cash showed a balance at August 31 of $9,2 . 2. The August ban! state"ent showed a closing balance of $#,$% . 3. The cash recei&ed on August 31 a"ounted to $3,1 . It was left at the ban! in the night de'ositor( chute after ban!ing hours on August 31 and therefore was not recorded b( the ban! on the August state"ent. 4. Also included with the August ban! state"ent was a debit "e"orandu" fro" the ban! for $2) re'resenting ser&ice charges for August. 5. A credit "e"orandu" enclosed with the August ban! state"ent indicated that a non*interest* bearing note recei&able for $3, fro" +o(ce ,isters -anes, left with the ban! for collection, had been collected and the 'roceeds credited to the account of Flagg, Inc. 6. Co"'arison of the 'aid chec!s returned b( the ban! with the entries in the accounting records re&ealed that chec! no. 912 for $.3 , issued August 1) in 'a("ent for co"'uter e/ui'"ent, had been erroneousl( entered in Flagg0s records as $3. . 7. 12a"ination of the 'aid chec!s also re&ealed that three chec!s, all issued in August, had not (et been 'aid b( the ban!: no. 91# for $2# 3 no. 919 for $13 3 no. 922 for $2 . 8. Included with the August ban! state"ent was a $2 chec! drawn b( ,haron +affer, a custo"er of Flagg, Inc. This chec! was "ar!ed 45,F.6 It had been included in the de'osit of August 2# but had been charged bac! against the co"'an(0s account on August 31. Instructions a. 7re'are a ban! reconciliation for Flagg, Inc., at August 31. b. 7re'are 8ournal entries 9in general 8ournal for": to ad8ust the accounts at August 31. Assu"e that the accounts ha&e not been closed. c. ,tate the a"ount of cash that should be included in the balance sheet at August 31.

Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

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Problem 7.2A
Protecting Ca ! +ason Towels, Inc. had 'oor internal control o&er its cash transactions. Facts about the co"'an(0s cash 'osition at +une 3 are described below. The accounting records showed a cash balance of $2 ,. , which included a de'osit in transit of $1,#) . The balance indicated in the ban! state"ent was $1),2 . Included in the ban! state"ent were the following debit and credit "e"oranda: Debit Memoranda: Chec! fro" custo"er, de'osited but charge bac! as 5,F................................................................................ $ 11 >an! ser&ice charges for +une........................................................................ 2) Check Memorandum: 7roceeds fro" collection of a note recei&able...............................................$#,1) ?utstanding chec!s as of +une 3 were as follows: Check No. mount 922$................................................................................................................ $ 3 922#................................................................................................................ $22 9333................................................................................................................ 222 933)................................................................................................................ ., Fred =onesto, the co"'an(0s cashier, has been ta!ing 'ortions of the co"'an(0s cash recei'ts for se&eral "onths. 1ach "onth, =onesto 're'ares the co"'an(0s ban! reconciliation in a "anner that conceals his thefts. =is ban! reconciliation for +une is illustrated as follows:

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Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

>alance 'er ban! state"ent, +une 3 ..................................... Add: @e'osits in transit......................................................... Collection of note....................................................... ,ubtotal.................................................................................. Aess: ?utstanding chec!s: 5o. 922$..................................................................... 5o. 922#..................................................................... 5o. 933)..................................................................... Ad8usted cash balance 'er ban! state"ent............................. >alance 'er accounting records, 5o& 3 ............................... Add: Credit "e"orandu" fro" ban!.................................... ,ubtotal.................................................................................. Aess: @ebit "e"oranda fro" ban!: 5,F chec!.................................................................. >an! ser&ice charges.................................................. Ad8usted cash balance 'er accounting records......................

$1),2 $.,2 9 #,1) $3 $22 222 13,3)9 $2%,))9

9$$ $2#,.1) 2 ,. #,1) $2#,#) 13) $2#,.1)

$11 )

Instructions a. @eter"ine the a"ount of cash shortage that has been concealed b( =onesto in his ban! reconciliation. 9As a for"at, we suggest that (ou 're'are the ban! reconciliation correctl(. The a"ount of the shortage then will be the difference between the ad8usted balances 'er the ban! state"ent and 'er the accounting records. Bou can then list this unrecorded cash shortage as the final ad8ust"ent necessar( to co"'lete (our reconciliation. b. Carefull( re&iew =onesto0s ban! reconciliation and e2'lain in detail how he concealed the a"ount of the shortage. Include a listing of the dollar a"ounts that were concealed in &arious wa(s. This listing should total the a"ount of shortage deter"ined in 'art a. c. ,uggest so"e s'ecific internal control "easures that a''ear to be necessar( for +ason Towels, Inc.

Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

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Problem 7."A
Aging Acco#nt Recei$able% &rite'o(( -oonglow, a >roadwa( 7ublicit( fir", uses the balance sheet a''roach to esti"ate uncollectible accounts e2'ense. At (ear*end an aging of the accounts recei&able 'roduced the following classification: 5ot (et due..................................................................................................... $$ , 1*3 da(s 'ast due.......................................................................................... 1) , 31*. da(s 'ast due........................................................................................ . , .1*9 da(s 'ast due........................................................................................ 2 , ?&er 9 da(s 'ast due.................................................................................... ) , Total......................................................................................................... $.% , ?n the basis of 'ast e2'erience, the co"'an( esti"ated the 'ercentages 'robabl( uncollectible for the abo&e fi&e age grou's to be as follows: <rou' 1, 1C3 <rou' 2, $C3 <rou' 3, 1 C3 <rou' $, 2)C3 and <rou' ), $ C The Allowance for @oubtful Accounts before ad8ust"ents at @ece"ber 31 showed a credit balance of $.,. . Instructions a. Co"'ute the esti"ated a"ount of uncollectible accounts based on the abo&e classification b( age grou's. b. 7re'are the ad8usting entr( needed to bring the Allowance for @oubtful Accounts to the 'ro'er a"ount. c. Assu"e that on +anuar( 1) of the following (ear, -oonglow learned that an account recei&able that had originated on ,e'te"ber 1 in the a"ount of $2,$ was worthless because of the ban!ru'tc( of the client, -a( Flowers. 7re'are the 8ournal entr( re/uired on +anuar( 1) to write off this account. d. The fir" is considering the ado'tion of a 'olic( whereb( clients whose outstanding accounts beco"e "ore than . da(s 'ast due will be re/uired to sign an interest*bearing note for the full a"ount of their outstanding balance. Dhat ad&antages would such a 'olic( offerE

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Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

Problem 7.)A
Acco#nting (or *ncollectible Acco#nt -ar( Factor( is a "anufacturer that "a!es all sales on 3 *da( credit ter"s. Annual sales are a''ro2i"atel( $$ "illion. At the end of 2 1, accounts recei&able were 'resented in the co"'an(0s balance sheet as follows: Accounts Fecei&able fro" Clients.................................................................$2,2 , Aess: Allowance for @oubtful Accounts........................................................ . , @uring 2 2, $13 , of s'ecific accounts recei&able were written off as uncollectible. ?f these accounts written off, recei&ables totaling $12, were subse/uentl( collected. At the end of 2 2, an aging of accounts recei&able indicated a need for an $% , allowance to co&er 'ossible failure to collect the accounts currentl( outstanding. -ar( Factor( "a!es ad8usting entries in its accounting records only at year-end. -onthl( and /uarterl( financial state"ents are 're'ared fro" wor!sheets, without an( ad8usting or closing entries actuall( being entered in the accounting records. 9In short, (ou "a( assu"e the co"'an( ad8usts its accounts onl( at (ear*end.: Instructions a. 7re'are the following general 8ournal entries: 1. ?ne entr( to su""ariGe all accounts written off against the allowance for doubtful accounts during 2 2. 2. 1ntries to record the $12, in accounts recei&able that were subse/uentl( collected. 3. The ad8usting entr( re/uired at @ece"ber 31, 2 2, to increase the allowance for doubtful accounts to $% , . b. 5otice that the allowance for doubtful accounts was onl( $. , at the end of 2 1, but uncollectible accounts during 2 2 totaled $1) , 9$13 , less the $12, reinstated:. @o these relationshi's a''ear reasonable, or was the allowance for doubtful accounts greatl( understated at the end of 2 1E 12'lain.

Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

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Problem 7.+A
Acco#nting (or Marketable Sec#ritie At @ece"ber 31, 1aston -anufacturing Co. owned the following in&est"ents in the ca'ital stoc! of 'ublicl( owned co"'anies 9all classified as a&ailable*for*sale securities::
Current Market !a"ue

Cost

Fo2 Co"'uter, Inc. 91, shares: cost, $$ 'er share3 "ar!et &alue, $. :........................................ Fast Foods 9), shares: cost, $1 7er share3 "ar!et &alue, $9:................................................. Totals......................................................................................

$$ , ) , $9 ,

$. , $), $9),

In 2002, 1aston engaged in the following two transactions: #une 5 ,old 1 shares of its in&est"ent in Fo2 Co"'uter at a 'rice of $.2 'er share, less a bro!erage co""ission of $) . #une 15 ,old 2,) shares of its Fast Foods stoc! at a 'rice of $% 'er share, less a bro!erage co""ission of $) . At @ece"ber 31, 2 Fast Foods, $%.) . 2, the "ar!et &alues of these stoc!s were: Fo2 Co"'uter, $$) 'er share3

Instructions a. Illustrate the 'resentation of "ar!etable securities and the unrealiGed holding gain or loss in Deston0s balance sheet at @ece"ber 31, 2001. Include a ca'tion indicating the section of the balance sheet in which each of these accounts a''ears. b. 7re'are 8ournal entries to record the transactions on +une ) and +une 1). c. 7rior to "a!ing a "ar!*to*"ar!et ad8ust"ent at the end of 2 2, deter"ine the unad8usted balance in the -ar!etable ,ecurities controlling account and the HnrealiGed =olding <ain 9or Aoss: on In&est"ents. 9Assu"e that no unrealiGed gains or losses ha&e been recogniGed since last (ear.: d. 7re'are a schedule showing the cost and "ar!et &alues of securities owned at the end of 2 2. 9Hse the sa"e for"at as the schedule illustrated abo&e.: e. 7re'are the 4"ar!*to*"ar!et6 ad8usting entr( re/uired at @ece"ber 31, 2 2. $. Illustrate the 'resentation of the "ar!etable securities and unrealiGed holding gain 9or loss: in the balance sheet at @ece"ber 31, 2002. 9Follow the sa"e for"at as in 'art a.: %. Illustrate the 'resentation of the net realized gains 9or losses: in the 2 2 inco"e state"ent. Assu"e a "ulti'le*ste' inco"e state"ent and show the ca'tion identif(ing the section in which this a"ount would a''ear. h. 12'lain how both the realiGed and the unrealiGed gains and losses will affect the co"'an(0s 2 2 inco"e ta2 return.

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Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

Problem 7.,A
Note Recei$able 5orthern ,u''l( sells a &ariet( of "erchandise to retail stores on o'en account, but it insists that an( custo"er who fails to 'a( an in&oice when due "ust re'lace it with an interest*bearing note. The co"'an( ad8usts and closes its accounts at @ece"ber 31. A"ong the transactions relating to notes recei&able were the following: &ct. 1 #u"' 1 Fecei&ed fro" a custo"er 9+7I: a nine*"onth, 12C note for $% , in settle"ent of an account recei&able due toda(. Collected in full the nine*"onth, 12C note recei&able fro" +7I, including interest.

Instructions a. 7re'are 8ournal entries 9in general 8ournal for": to record: 91: the recei't of the note on ?ctober 13 92: the ad8ust"ent for interest on @ece"ber 313 and 93: the collection of 'rinci'al and interest on +ul( 1. 9To better illustrate the allocation of interest re&enue between accounting 'eriods, we will assu"e 5orthern ,u''l( "a!es ad8usting entries only at year-end.: b. Assu"e that instead of 'a(ing the note on +ul( 1, the custo"er 9+7I: had defaulted. <i&e the 8ournal entr( b( 5orthern ,u''l( to record the default. Assu"e that +7I has sufficient resources that the note e&entuall( will be collected. c. 12'lain wh( the co"'an( insists that an( custo"er who fails to 'a( an in&oice when due "ust re'lace it with an interest*bearing note.

Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2

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Alternate Problems for use with Financial and Managerial Accounting, 12e ; The -c<raw*=ill Co"'anies, 2 2