An accounting clerk for Chesner Co. prepared the following bank reconciliation:
Chesner Co.Bank ReconciliationJuly 31, 2014Cash balance according to company’s records . . . . . . . . . . . . . . . . . . . . . . . $11,100Add: Outstanding checks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,585Error by Chesner Co. in recording CheckNo. 1056 as $950 instead of $590 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 360Note for $12,000 collected by bank, including interest . . . . . . . . . . . 12,480 16,425$27,525Deduct: Deposit in transit on July 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 7,200Bank service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 7,225Cash balance according to bank statement . . . . . . . . . . . . . . . . . . . . . . . . . . $20,300a. From the data in the above bank reconciliation, prepare a new bank reconciliation for Chesner Co., using the format shown in the illustrative problem.b. If a balance sheet were prepared for Chesner Co. on July 31, 2014, what amount should be reported for cash?Answer:
a.CHESNER CO.Bank ReconciliationJuly 31, 2014Cash balance according to bank statement $20,300Add: Deposit in transit on July 31 7,200$27,500Deduct: Outstanding checks 3,585Adjusted balance $23,915Cash balance according to company’s records $11,100Add: Error in recording Check No. 1056 as $950instead of $590 $ 360Note for $12,000 collected by bank, includinginterest 12,480 12,840$23,940Deduct: Bank service charges 25Adjusted balance $23,915
b. $23,915
Identify the errors in the following bank reconciliation:
Poway Co.Bank ReconciliationFor the Month Ended June 30, 2014Cash balance according to bank statement . . . . . . . . . . . . . . . . . . . . . . . . . . $16,185Add outstanding checks:No. 1067 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 575 1106 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 470 1110 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,050 1113 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 910 3,005$19,190Deduct deposit of June 30, not recorded by bank . . . . . . . . . . . . . . . . . . . . 6,600Adjusted balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $12,590Cash balance according to company’s records . . . . . . . . . . . . . . . . . . . . . . . $ 8,985Add: Proceeds of note collected by bank:Principal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $6,000Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 300 $6,300Service charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15 6,315$15,300Deduct: Check returned because of insufficient funds . . . . . . . . . . . . . . . . $ 890Error in recording June 17 deposit of $7,150 as $1,750 . . . . . . . . 5,400 6,290Adjusted balance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 9,010Answer:1. The heading should be “June 30, 2014,” and not “For the Month Ended June 30, 2014.”2. The outstanding checks should be deducted from the balance per bank.3. The deposit of June 30, not recorded by the bank, should be added to the balance per bank.4. Service charges should be deducted from the balance per company’s records.5. The error in recording the June 17 deposit of $7,150 as $1,750 should be added to the balance per company’s records.
A correct bank reconciliation would be as follows:POWAY CO.Bank ReconciliationJune 30, 2014Cash balance according to bank statement $16,185Add deposit of June 30, not recordedby bank 6,600$22,785Deduct outstanding checks:No. 1067 $ 5751106 4701110 1,0501113 910 3,005Adjusted balance $19,780Cash balance according to company’s records $ 8,985Add: Proceeds of note collected by bank:Principal $6,000Interest 300 $6,300Error in recording June 17deposit as $1,750 instead of $7,150 5,400 11,700$20,685Deduct: Check returned becauseof insufficient funds $ 890Service charges 15 905Adjusted balance $19,780
Alaska Impressions Co. records all cash receipts on the basis of its cash register tapes. Alaska Impressions Co. discovered during October 2014 that one of its sales clerks had stolen an undetermined amount of cash receipts by taking the daily deposits to the bank. The following data have been gathered for October:
Cash in bank according to the general ledger $11,680Cash according to the October 31, 2014, bank statement 13,275Outstanding checks as of October 31, 2014 3,670Bank service charge for October 40Note receivable, including interest collected by bank in October 2,100No deposits were in transit on October 31.a. Determine the amount of cash receipts stolen by the sales clerk.b. What accounting controls would have prevented or detected this theft?Answer:a. The amount of cash receipts stolen by the sales clerk can be determined by attempting to reconcile the bank account. The bank reconciliation will not reconcile by the amount of cash receipts stolen. The amount stolen by the sales clerk is $4,135, determined as shown below.
ALASKA IMPRESSIONS CO.Bank ReconciliationOctober 31, 2014Cash balance according to bank statement $13,275Deduct: Outstanding checks 3,670Adjusted balance $ 9,605Cash balance according to company’s records $11,680Add: Note collected by bank, including interest 2,100$13,780Deduct: Bank service charges 40Adjusted balance $13,740Amount stolen: $4,135 ($13,740 – $9,605)b. The theft of the cash receipts might have been prevented by having more than one person make the daily deposit. Collusion between two individuals would then have been necessary to steal cash receipts. In addition, two employees making the daily cash deposits would tend to discourage theft of the cash receipts from the employees on the way to the bank.Daily reconciliation of the amount of cash receipts—comparing the cash register tapes to a receipt from the bank as to the amount deposited (a duplicate deposit ticket)—would also discourage theft of the cash receipts. In this latter case, if the reconciliation were prepared by an employee independent of the cash function, any theft of cash receipts from the daily deposit would be discovered immediately. That is, the daily deposit would not reconcile against the daily cash receipts.
Mattel, Inc., designs, manufactures, and markets toy products worldwide. Mattel’s toys include Barbie™ fashion dolls and accessories, Hot Wheels™, and Fisher-Price brands. For a recent year, Mattel reported the following net cash flows from operating activities (in thousands):
First quarter ending March 31 $ (41,844)Second quarter ending June 30 (184,934)Third quarter ending September 30 (55,548)Fourth quarter ending December 31 955,600Explain why Mattel reported negative net cash flows from operating activities during the first three quarters and a large positive cash flow for the fourth quarter, with overall net positive cash flow for the year.Answer:Toy manufacturers and retailers experience a seasonal trend in cash flows from operating activities. Mattel, Inc., experiences negative cash flows during the periods when merchandise is ordered for the holiday season. Mattel, Inc., generates positive cash flows during the holiday season, November–December. As a result, Mattel, Inc., reports overall positive net cash flows from operating activities for the year.
Journalize the entries to record the following:a. Check No. 33694 is issued to establish a petty cash fund of $900.b. The amount of cash in the petty cash fund is now $70. Check No. 33749 is issued to replenish the fund, based on the following summary of petty cash receipts: office supplies, $525; miscellaneous selling expense, $190; miscellaneous administrative expense, $85. (Since the amount of the check to replenish the fund plus the balance in the fund do not equal $900, record the discrepancy in the cash short and over account.)Answer:
a. Petty Cash 900Cash 900
b. Office Supplies 525Miscellaneous Selling Expense 190Miscellaneous Administrative Expense 85Cash Short and Over 30Cash 830
During 2014, El Dorado Inc. has monthly cash expenses of $168,500. On December 31, 2014, the cash balance is $1,415,400.a. Compute the ratio of cash to monthly cash expenses.b. Based on (a), what are the implications for El Dorado Inc.?Answer:a. 8.4 months ($1,415,400 ÷ $168,500)b. At the current rate of operations, El Dorado has 8.4 months of cash remaining. El Dorado should either restructure its operations or begin planning on raising additional financing in order to continue in business.
Capstone Turbine Corporation produces and sells turbine generators for such applications as charging electric, hybrid vehicles. Capstone Turbine reported the following financial data for a recent year (in thousands):Net cash flows from operating activities $(21,899)Cash and cash equivalents 33,456a. Determine the monthly cash expenses. Round to one decimal place.b. Determine the ratio of cash to monthly cash expenses. Round to one decimal place.c. Based on your analysis, do you believe that Capstone Turbine will remain in business?Answer:a. $1,824.9 ($21,899 ÷ 12)b. 18.3 months ($33,456 ÷ $1,824.9)c. Capstone Turbine has cash to continue its operations for approximately 18.3 months.
Boeing is one of the world’s major aerospace firms, with operations involving commercial aircraft, military aircraft, missiles, satellite systems, and information and battle management systems. As of a recent year, Boeing had $2,969 million of receivables involving U.S. government contracts and $1,241 million of receivables involving commercial aircraft customers, such as Delta Air Lines and United Airlines.Should Boeing report these receivables separately in the financial statements, or combine them into one overall accounts receivable amount? Explain.Answer:Accounts receivable from the U.S. government are significantly different from receivables from commercial aircraft carriers such as Delta and United. Thus, Boeing should report each type of receivable separately. In its filing with the Securities and Exchange Commission, Boeing reports the receivables together on the balance sheet, but discloses each receivable separately in a note to the financial statements.
Allos Therapeutics, Inc., is a biopharmaceutical company that develops drugs for the treatment of cancer. Allos Therapeutics reported the following financial data (in thousands) for three recent years:
For Years Ended December 31Year 3 Year 2 Year 1Cash and cash equivalents $ 48,402 $141,423 $30,696Net cash flows from operations (63,656) (62,199) (42,850)a. Determine the monthly cash expenses for Year 3, Year 2, and Year 1. Round to one decimal place.b. Determine the ratio of cash to monthly cash expenses for Year 3, Year 2, and Year 1 as of December 31. Round to one decimal place.c. Based on (a) and (b), comment on Allos Therapeutics’ ratio of cash to monthly operating expenses for Year 3, Year 2, and Year 1.Answer:a. Year 3: $5,304.7 per month ($63,656 ÷ 12)Year 2: $5,183.3 per month ($62,199 ÷ 12)Year 1: $3,570.8 per month ($42,850 ÷ 12)b. Year 3: 9.1 months ($48,402 ÷ $5,304.7)Year 2: 27.3 months ($141,423 ÷ $5,183.3)Year 1: 8.6 months ($30,696 ÷ $3,570.8)c. Since Year 1, Allos Therapeutics monthly cash expenses have increased from $3,570.8 in Year 1 to $5,304.7 in Year 3. The ratio of cash to monthly cash expenses has increased from 8.6 months at the end of Year 1, to 27.3 months at the end of Year 2. Allos Therapeutics increased its monthly cash expenses in Year 3 to $5,304.7 per month and at the end of Year 3 it will run out of cash in just over nine months assuming it doesn’t change its operations or raise additional financing. Unless the company improves its cash flows, it may have difficulty raising sufficient cash from investors or creditors to continue operations in the long term.
At the end of the current year, the accounts receivable account has a debit balance of $6,125,000 and net sales for the year total $66,800,000. Determine the amount of the adjusting entry to provide for doubtful accounts under each of the following assumptions:a. The allowance account before adjustment has a debit balance of $18,000. Bad debt expense is estimated at ¾ of 1% of net sales.b. The allowance account before adjustment has a debit balance of $18,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $475,000.c. The allowance account before adjustment has a credit balance of $10,000. Bad debt expense is estimated at ½ of 1% of net sales.d. The allowance account before adjustment has a credit balance of $10,000. An aging of the accounts in the customer ledger indicates estimated doubtful accounts of $360,000.Answer:a. $501,000 ($66,800,000 × 0.0075)b. $493,000 ($475,000 + $18,000)c. $334,000 ($66,800,000 × 0.0050)d. $350,000 ($360,000 – $10,000)
Journalize the following transactions in the accounts of Pro Medical Co., a medical equipment company that uses the direct write-off method of accounting for uncollectible receivables:Jan. 30. Sold merchandise on account to Dr. Cindy Mott, $85,000. The cost of the merchandise sold was $50,000.June 3. Received $48,000 from Dr. Cindy Mott and wrote off the remainder owed on the sale of January 30 as uncollectible.Nov. 27. Reinstated the account of Dr. Cindy Mott that had been written off on June 3 and received $37,000 cash in full payment.Answer:
Jan. 30 Accounts Receivable—Dr. Cindy Mott 85,000Sales 85,00030 Cost of Merchandise Sold 50,000Merchandise Inventory 50,000June 3 Cash 48,000Bad Debt Expense 37,000Accounts Receivable—Dr. Cindy Mott 85,000Nov. 27 Accounts Receivable—Dr. Cindy Mott 37,000Bad Debt Expense 37,00027 Cash 37,000Accounts Receivable—Dr. Cindy Mott 37,000
