CHAPTER 1

PROBLEMS
PROBLEM NO. 1
COMPUTING THE CORRECT CASH BALANCE

Your audit of the December 31, 2009, financial statements of Daylight Company, reveals the following:

Current account at East Bank $ -15,000

Current account at West Bank 43,200
Treasury bills, (acquired 3 months before maturity) 150,000
Treasury bills, (maturity date is 12/31/12) 2,500,000
Payroll account 175,000
Foreign bank account-restricted (translated using the 12/31/09 rate) 4,000,000
Postage stamps 450
Employee's postdated check 3,500
IOU from the vice-president 13,000
Credit memo from a supplier for a purchase return 7,200
Traveler's check 15,000
Money order 7,000
Petty cash fund ($3,000 in currency and expense receipts for $7,000) 10,000

REQUIRED:
What amount would be reported as cash and cash equivalents on the balance sheet
on December 31, 2009?
Solution:
Current account at West Bank 43,200
Treasury bills, (acquired 3 months before maturity) 150,000
Payroll account 175,000
Traveler's check 15,000
Money order 7,000
Petty cash fund 3,000
393,200

PROBLEM NO. 2
PETTY CASH FUND

The auditor of Herald, Inc., examined the petty cash fund immediately after the close of business,
July 31, 2009, the end of the company's natural business year. The petty cash custodian presented
the following during the count:

Currency $ 650
Petty Cash Vouchers:
Postage 420
Office supplies expense 900
Transportation expense 140
Computer repairs 400
Advances to office staff 700
A check drawn by Herald, Inc., payable to the petty cash custodian 3,050
Postage stamps 300
An employee's check, returned by bank, marked NSF 1,000
An envelope containing currency of $440 for a gift for a retiring employee 440
$ 8,000

The general ledger shows an imprest petty cash fund balance of $8,000.
REQUIRED:
1. How much is the petty cash shortage or overage?
Currency and coins 650
Petty cash vouchers 2,560
Replenishment check 3,050
NSF check 1,000
7,260
Petty cash fund (ledger) accountability (8,000)
Shortage (740)

2. What adjusting entry should be made as of July 31, 2009?

a. Postage 420
Office supplies 900
Trasportation 140
Repairs 400
Advances to employees 700
PCF 2,560

b. Unused postage stamps 300

Postage expense 300

c. Advances to employees 1,000

PCF 1,000

d. Cash shor or over 740

PCF 740

3. What is the adjusted balance of petty cash fund at July 31, 2009?

Currency 650
Replenishment check 3,050
3,700

PROBLEM NO. 3 (assignment)

COUNT OF PETTY CASH FUND AND UNDEPOSITED COLLECTIONS

In connection with your audit of the financial statements of Alley Company for the year ended
December 31, 2009, you conducted a surprise count of the company's petty cash fund and
undeposited collections at 8:20 am on January 3, 2010. Your count disclosed the following:

Bills and coins

Bills Coins
$100.00 5 pieces $1.00 205 pieces
50.00 40 pieces 0.50 162 pieces
20.00 35 pieces 0.25 32 pieces
10.00 27 pieces

Checks

Date Payee Maker Amount

Dec. 30 Cash Custodian $ 1,200

Dec. 30 Alley Company SLV, Inc. 14,000
Dec. 31 Alley Company Marvin Lee, sales manager 1,680
Dec. 31 Alley Company MSU Corp. 17,800
Dec. 31 Alley Company Athens, Inc. 8,300
Dec. 31 Taiwan Corp. (not endorsed) Alley Company 27,000
Unreimbursed vouchers

Date Payee Maker Amount

Dec. 23 Marvin Lee, sales manager Advance trip to Bali 7,000

28 Central Post Office Postage stamps 1,620
29 Messengers Transportation 150
29 Byte, Inc. Computer repair 800

Other items found inside the cash box:

1 Unclaimed pay envelope of John McDermont. Indicated on the pay slip is his net salary of $7,500.
Your inquiry revealed that John's salary is mingled with the petty cash fund.
2 The sales manager's liquidation report for his Bali Trip:

Cash advance received on December 23 7,000

Less: Hotel accommodation, meals, etc 4,500
Bus fare for two 400
Cash given to Paul, salesman 300 5,200
Balance 1,800

Accounted for as follows:

Cash returned by Paul to the Sales manager 120
Personal check of the sales manager 1,680
Total 1,800

Additional information:
1 The custodian is not authorized to cash the checks.
2 The last official receipt included in the deposit on December 30 is No. 4351 and the last official
receipt issued for the current year is No. 4355. The following official receipts are all dated
December 31, 2009.

OR No. Amount Form of Payment

4352 $ 13,600 Cash

4353 17,800 Check
4354 3,600 Cash
4355 8,300 Check

3 The petty cash balance per general ledger is $10,000. The last replenishment of the fund was
made on December 22, 2009.

REQUIRED:
1. Prepare a cash count sheet.

Cash Count Sheet

January 3, 2010-8:20 AM

Biils and coins:

Denomin
ation Qty Amount Total

$ 100.00 5 500
50.00 40 2,000
20.00 35 700
10.00 27 270
1.00 205 205
0.50 162 81
0.25 32 8 $ 3,764
Checks:
Date Maker Amount

Dec. 30 Custodian 1,200

Dec. 30 SLV, Inc. 14,000
Dec. 31 Marvin Lee 1,680
Dec. 31 MSU Corp 17,800
Dec. 31 Athens, Inc 8,300 42,980

Unreimbursed vouchers:
Date Account Amount

Dec. 23 Advances 7,000

Dec. 28 Postage 1,620
Dec. 29 Transportation 150
Dec. 29 Repairs 800 9,570

Total Cash accounted 56,314

Less:; Accountabilities
Petty cash 10,000
Collections (per OR) 43,300
Unclaimed salary 7,500
Excess travel advance 1,680
Unreceipted collections from SLV, Inc 14,000 76,480
Cash Shortage -20,166

2. Prepare the necessary adjusting journal entries on December 31, 2009.

1. Cash 14,000
Accounts receivable 14,000

2. Advances to OE 7,000
Postage 1,620
Transportation 150
Repairs 800
PCF 9,570

3. Unused postage 365

Postage 365

4. Cash 7,500
Salaries payable 7,500

5. Receivable from custodian 20,166

Cash 20,166

6. Travel expense (4,500+400+300-120) 5,080

PCF 1,680
Advances to OE 6,760

Note: The sales manager's advances will reflect a debit balance of $240 (7,000-6,760)

Cash advance 7,000

Less: Hotels, meal, etc. 4,500
Bus fare 400
Paul (300-120) 180 5,080
Cash to be returned 1,920
Cash actual returned -1,680
Shortage due from sales manager 240
PROBLEM NO. 4
BANK RECONCILIATION-UNADJUSTED TO ADJUSTED BALANCE

Jingle, Inc.'s newly-hired accountant prepared the following cash reconciliation as of June 30, 2009:

Bank Book

Unadjusted balances $ 268,367 $ 79,367

Deposit in transit -15,000
Bank service charge 1,000
Check written and recorded on June 30 but was
released on July 4 -12,000
Outstanding checks 36,000
NSF check 17,000
Loan proceeds (company not informed) 200,000
Erroneous bank debit 15,000
Customer's checks received on June 29 (all dated
July 6), included in deposits in transit 9,000
Certified checks 11,000
Unlocated difference 345,000
$ 477,367 $ 477,367

REQUIRED: Prepare a correct cash reconciliation on June 30, 2003.

Jingle, Inc.
Bank Reconciliation
June 30, 2009

Book Bank

Unadjusted balances $ 79,367 $ 268,367

Deposit in transit ($15,000-$9,000) 6,000
Bank service charge -1,000
Unreleased check 12,000
Outstanding check ($36000-$11000) -25,000
NSF check -17,000
Loan proceeds 200,000
Erroneous bank debit 15,000
Post-dated check -9,000
Adjusted balances $ 264,367 $ 264,367

PROBLEM NO. 5
COMPUTATION OF RECEIPTS, DISBURSEMENTS, AND CASH BALANCE;
BANK RECONCILIATION-UNADJUSTED TO ADJUSTED

Haggler Company was organized on January 2, 2009. The following items are from the company's trial
balance on December 31, 2009:

Common Stock $ 1,200,000

Additional-paid-in capital 50,000
Merchandise inventory 69,000
Land 1,000,000
Building 1,400,000
Furniture and fixtures 367,000
Accounts receivable 165,400
Accounts payable 389,650
Notes payable-bank 500,000
Sales 6,235,200
Expenses paid (excluding purchases) 605,150

Additional information:

Deposit in transit, December 31 $ 45,167

Service charge for December 2,000
Outstanding checks, December 31 163,666
Bank balance, December 31 520,159
Haggler Company's mark up on sales is 30%
REQUIRED:
1. Compute the following:
a. Collection from sales.
Sales $ 6,235,200
Less: Accounts receivable, 12/31 165,400
Collection from sales $ 6,069,800
b. Payments for purchases.

Cost of sales ($6,325,200 x 70%) $ 4,364,640

Add: Merchandise inventory, 12/31 69,000
Purchases $ 4,433,640
Less: Accounts payable, 12/31 389,650
Payment for purchases $ 4,043,990

c. Cash balance on December 31, 2009.

Cash receipts:
Issue price of common stock ($1,200,000 + $50,000) $ 1,250,000
Notes payable-bank 500,000
Collection 6,069,800
Total 7,819,800
Cash Disbursements:
Land $ 1,000,000
Building 1,400,000
Furniture and fixtures 367,000
Expenses paid 605,150
Payment for purchases 4,043,990 7,416,140
Cash balance per books, December 31 $ 403,660

2. Prepare a bank reconciliation as of December 31, 2009.

Haggler Company
Bank Reconciliation
June 30, 2009

Book Bank

Unadjusted balances $ 403,660 $ 520,159

Deposits in Transit 45,167
Service charge -2,000
Outstanding checks -163,666
$ 401,660 $ 401,660

PROBLEM NO. 6
DETERMINING NET ADJUSTMENT TO CASH

Your audit of the cash account of Angel Company disclosed the following information:

Cash balance per books, 12/31/09 $ 35,000

Bank statement balance, 12/31/09 60,000
Loan proceeds (no entry on company books) 300,000
Debit memo for a checkbook 100
Deposit in transit, 12/31/09 15,200
Transposition error made by bank in recording deposit of
'December 28:
Correct amount $ 45,000
Recorded as 54,000 9,000
Erroneous bank debit 26,700
Included in the cash count is petty cash fund of $10,000. Your
count on December 31, 2009, revealed the following fund items:
Currency and coins $ 3,500
Supplies 2,400
Transportation 100
IOUs 4,000 10,000
Erroneous bank credit 11,000
Outstanding checks (including a certified check of $10,000) 39,400
REQUIRED: Determine the net adjustment to the Cash balance per books on
December 31, 2009.

Bank balance, December 31, 2009 $ 60,000

Deposit in Transit 15,200
Transposition error in recording deposit ($54,000-$45,000) -9,000
Erroneous bank debit 26,700
Erroneous bank credit -11,000
Outstanding check ($39,400-$10,000) -29,400
Adjusted bank balance, December 31, 2009 $ 52,500
Book balance, December 31, 2009 35,000
Net adjustment-debit $ 17,500

PROBLEM NO. 7
BANK RECONCILIATION-UNADJUSTED TO ADJUSTED BALANCE

In connection with an audit, you are given the following bank reconciliation.

Bank Reconciliation
December 31, 2009

Balance per ledger, 12/31/09 $ 34,349.72

Add: Collections received on the last day of December
and charged to "Cash in Bank" on books but not
deposited 5,324.50
Debit memo for customer's check returned unpaid (check is
on hand but no entry has been made on the books) 4,000.00
Debit memo for bank service charge for December 1,000.00
$ 46,674.22
Deduct: Outstanding checks (see detailed below) $ 18,625
Credit memo for proceeds of a note
receivable which has been left at the
bank for collection but which has not been
recorded as collected 8,000
Check for an account payable entered on
books as $12,625 but drawn and paid
by bank as $16,225 3,600 32,225.00
Computed balance $ 14,449.22
Unlocated difference 36,601.00
Balance per bank (checked to confirmation) $ 51,050.22

List of outstanding checks, December 31, 2009

Check No. Amount

14344 $ 5,820
14358 1,295
14367 3,543
14399 2,001
14401 4,892
14407 5,074
$ 18,625

REQUIRED:
1. Prepare a corrected reconciliation.

Bank Reconciliation
December 31, 2009

Book Bank

Unadjusted balances $ 34,349.72 $ 51,050.22

Deposit in transit 5,324.50
Customer's check returned -4,000.00
Bank service charge -1,000.00
Outstanding checks -22,625.00
Credit memo for note collected 8,000.00
Debit to accounts payable-understated -3,600.00
$ 33,749.72 $ 33,749.72

2. Prepare journal entries for items which should be adjusted prior to closing the books.

ADJUSTING JOURNAL ENTRIES

December 31, 2009
 a. Accounts receivable $ 4000
Cash in bank $ 4,000
To record check returned to customers

b. Bank service charge 1000

Cash in bank 1,000
To record bank charges.

c. Cash in bank 8000

Notes receivable 8,000
To record note collected by bank.

d. Accounts payable 3600

Cash in bank 3,600
To record understatement of accounts payable

PROBLEM NO. 8
BANK RECONCILIATION AND CASH SHORTAGE COMPUTATION

In connection with your audit of the Summerville Company at December 31, 2009, you were
given a bank reconciliation by a company employee which shows:

Balance per bank $ 30,534

Deposits in transit 37,856
$ 68,390
Outstanding checks 42,756
Balance per books $ 25,634

As part of your verification, you obtain the bank statement and cancelled checks from the bank on
January 15, 2010. Checks issued from January 1 to January 15, 2010, per books were $22,482.
Checks returned by the bank on January 15 amounted to $58,438. Of the checks outstanding
December 31, $9,600 were not returned by the bank with the January 15 statement, and of those
issued per books in January 2010, $7,200 were not returned.

REQUIRED:
1. Calculate the disbursements per books based on the above data.

Outstanding checks, January 15:

From December or before $ 9,600
From January 7,200 $ 16,800
Add: Disbursement per bank statement 58,438
Total $ 75,238
Less: Outstanding checks, December 31 42,756
Disbursements per book as computed $ 32,482
Disbursements per book as reported 22,482
Difference in disbursements $ 10,000

2. Suggest three possible explanations for the difference between the disbursements
per books as computed and as reported.

a. The bank disbursements ($58,438) may be overstated by $10,000. Another company check
for $10,000 may have been charged erroneously by the bank against the client's account.

b. The December 31 outstanding checks may be understated by $10,000. Since the bank
reconciliation given in the problem was prepared by a company employee, there is no
assurance that it is correct.

c. The client's employee may have failed to record check/s issued in January thus understating
the book disbursements ($22,482).

PROBLEM NO. 9
PROOF OF CASH

You have been instructed by your supervisor on an audit to prepare a four-column proof of cash
receipts and disbursements for the month of June.

RECONCILIATION
May 31, 2009

Bank balance $ 652,000

Add: Deposit in transit 10,000
Total $ 662,000
Less: Outstanding checks
No. 640 $ 10,000
 652 8,000
653 2,000 20,000
Adjusted bank balance $ 642,000

Book balance $ 570,800

Add: Proceeds for note receivable collected in
May $ 70,000
Deposit on May 31 not recorded on books
until June 2,000 72,000
Total $ 642,800
Less: Bank charges 800
Adjusted book balance $ 642,000

The June 2009 bank statement is shown below:

Westlake Bank
Period covered: May 31, 2009 - June 30, 2009

Date Checks Deposits

01-Jun $ 8,000 $ 10,000

08-Jun 2,000
11-Jun 14,000 20,000
13-Jun 1,000 DM 1,000
16-Jun 4,000
21-Jun 12,000 56,000
27-Jun 18,000
29-Jun 1,000 EC 1,000 EC
30-Jun 200 SV
30-Jun 3,000 DM

SV Service Charge DM Debit Memo

EC Error Corrected CM Credit Memo

The paid checks accompanying this bank statement (all clearing in June) are the following:

No. 652 $ 8,000 No. 655 $4,000

No. 653 2,000 No. 657 12,000
No. 654 14,000 No. 658 18,000

The check register reveals that the last check issued in June is No, 659 for $5,000 and that
check no. 656 is for $2,600.

Cash received for the period June 22 through June 30 of $70,000 was deposited in the bank
on July 1.

the debit memos on June 13 and June 30 represent customers' NSF checks returned by the
bank. The June 13 NSF check was immediately redeposited without entry. The June 30 NSF
check was redeposited on July 1 without entry.

REQUIRED:
1. Determine the following:
a. Bank receipts in June.
Bank receipts in June (arrived at footing the Deposits column
of the bank statement $ 88,000

b. Bank disbursements in June.

Bank disbursements in June (arrived at footing the Checks column
of the bank statement $ 63,200

c. Bank balance on June 30, 2009.

Bank balance, May 31 652,000
Add: Bank receipts, June 88,000
Total $ 740,000
Less: Bank disbursements, June 63,200
Bank balance, June 30 $ 676,800

2. Prepare a proof of cash for June. Use the bank to book format.

PROOF OF CASH
June 1-30, 2009

June
Balance Disburse- Balance
May 31 Receipts ments June 30

Bank balances $652,000 $88,000 $63,200 $676,800

Deposit in transit:
 May 31 10,000 -10,000
June 30 70,000 70,000
Outstanding checks
May 31 -20,000 -20,000
June 30 17,600 -17,600
Bank service charge
May 31 800 800
June 30 -200 200
Bank collection in May -70,000 70,000
May deposit recorded by
the company in June -2,000 2,000
NSF checks:
Already redeposited -1,000 -1,000
Not yet redeposited -3,000 3,000
book error corrected within
the same day -1,000 -1,000
$570,800 $218,000 $56,400 $732,400

PROBLEM NO. 10
PROOF OF CASH - UNADJUSTED TO ADJUSTED BALANCES

In your audit of Langley Company's cash account as of December 31, 2009, you ascertain the
following information:

The bookkeeper's bank reconciliation on November 30, 2009, is as follows:

Balance per bank statement, November 30 $ 24,298

Add: Deposits in transit 3,648
Total 27,946
Less: Outstanding checks
No. 3408 $ 440
No. 3413 300
No. 3414 6,820
No. 3416 3,924
No. 3417 800 12,284
Balance $ 15,662
Add: Bank service charge for November 36 *
Balance per general ledger, November 30 $ 15,698

*Entered in Check Register in December.

The Cash Receipts Journal shows total receipts for December of $371,766. The Check Register
reflects total checks issued in December of $377,632. A collection was recorded on company books
on December 31 but was not deposited until January 2, 2010.

The balance per bank statement at December 31, 2009 is $17,516. This statement shows total receipts
of $373,502 and checks paid of $380,284.

Your examination reveals the following additional information:

1. Check no. 3413 dated November 24, 2009, was entered in the Check Register as $300.
Your examination of the paid checks returned with the December bank statement reveals that
the amount of this check is $30.

2. Check no. 3417 was mutilated and returned by the payee. A replacement check (no. 3453)
was issued. Both checks were entered in the Check Register but no entry was made to
cancel no. 3417.

3. The December bank statement includes an erroneous charge of $480.

4. On January 3, 2010, the bank informed your client that a December bank service charge of $42
was omitted from the statement.

5. Your examination of the bank credit memo accompanying the December bank statement
discloses that it represent proceeds from the note receivable collection in December for $4,000.

6. The outstanding checks at December 31, 2009 are as follows:

No. 3408 $ 440

No. 3417 800
No. 3418 2,814
No. 3419 5,788

REQUIRED: Prepare a proof of cash for December 2009. Use the unadjusted to adjusted
balances format.
 Langley Company
Proof of cash
December 1-31, 2009

December
Balance Disburse- Balance
Nov. 30 Receipts ments Dec. 31

Book Balance $15,698 $371,766 $377,668 $9,796

Bank service charges:
Nov. 30 -36 -36
Dec. 31 42 42
Overstatement of
disbursements
(check #3413) 270 270
Mutilated check 800 800
Note collected by bank 4,000 4,000
Adjusted book balance 16,732 375,766 377,674 $14,824

Bank balance $24,298 $373,502 $380,284 $17,516

Deposit in Transit
Nov. 30 3,648 -3,648
Dec. 31 5,912 5,912
Erroneous bank charge -480 480
Bank service charge 42 -42
Outstanding checks
Nov. 30 -11,214 -11,214
Dec. 31 9,042 -9,042
Adjusted bank balance $16,732 $375,766 $377,674 $14,824

Note: $377,632 + $36 = $377,668

$15,698 + $371,766 - $377,668 = $9,796

PROBLEM NO. 11
CASH IN BANK - CASH SHORTAGE COMPUTATION

The Hummingbird Company does not have adequate controls over its cash transactions. During your
audit, you found the following data concerning its cash position at December 31, 2009.

1. On the company's records, the cash balance was $173,500.

2. A credit of $2,500 for a note collected by the bank does not appear on the company's records.
3. The bank statement balance is $135,000.
4. Outstanding checks are as follows:

Number Amount
1428 $ 5,200
1431 3,600
1445 4,080
1446 3,460

The cashier made the following reconciliation:

Balance per bank statement $ 135,000

Deduct: Outstanding checks
1431 $ 3,600
1445 4,080
1446 3,460 10,140
$ 124,860
Add: Undeposited collections
(per count) $ 46,140
Collected note 2,500 48,640
Cash per books, December 31, 2009 $ 173,500

REQUIRED:
1. What is the amount of the shortage?

Book Bank

Unadjusted balances $173,500 $135,000

Note collected by the bank 2,500
Outstanding check -16,340
Undeposited collection 46,140
Corrected balance $176,000 $164,800
SHORTAGE -11,200
$164,800 $164,800

2. How did the cashier attempt to hide the shortage?

The cashier attempted to conceal the shortage as follows:

Omission of outstanding check #1428 $5,200

Underfooting of outstanding checks in reconciliation
($11,140-$10,140) 1,000
Adding (instead of deducting) the unrecorded note collected
by the bank 5,000
Total $11,200