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Question 14:

a.
b.
c.
d.
e.
f.
g.
h.
i.
j.

Short-term assets
Credit card sale
Internal control
Cash
Segregation of duties
None
Debit card sale
Order of liquidity
Electronic fund transfers (EFTs)
Assets

Question 15:
Date
Nov. 1

Description
Cash

Debit

Credit
210

Sales

200

GST Payable

10

Cash sale of service for the day

Cash

519.80

Sales

460

PST Payable

36.80

GST Payable

23

Cash sale of merchandise for the day

Cash
Credit card expense

2214.80
45.20

Sales

2000

PST Payable

160

GST Payable

100

Credit card sale less 2% credit card


expense

Nov. 1

Cash
Sales

5198
4600

PST Payable

368

GST Payable

230

Debit card sale for the day

Debit card transaction fees expense


Cash

375
375

To record service charges on debit card


transactions

Question 16:
Pita Perfection Business Report by Gabriel Gichuhi
Executive Summary
Pita Perfection needs an internal control system that establishes responsibilities
within the business. It is recommended that electronic cash registers would help
prevent monetary loss and would also limit the employees access to the
registers on their shifts.
Problem Statement
Pita Perfection would like to improve control of cash flow. Since its opening, the
business has had concerns on how to achieve better monetary control. This
report considers the issue and recommends a course of action to the owners
Craig and Anne.
Analysis
Currently, Pita Perfection does not have internal controls in place to protect the
business from irregularities or theft. The business needs to determine the best
methods to minimize the chances of loss.
Decision Criteria and Alternatives
Internal controls for Pita Perfection in order to protect it against theft, errors and
irregularities should include the following:

Limit access of cash registers to only those who are working as cashiers
for that shift

Train employees on cashier registry for less mistakes

Have cash receipts listed in numerical sequences

Have manager/owner count daily cash receipts at the end of day

Use independent verification of cash at the end of the day. Have the
cashier count out the cash from the till. Match balance to amount stated on end
of day print out.

Electronic cash registers for more accurate end of shift cash totals.

Match receipt totals with daily bank deposits by the accountant of the
business

Implement an electronic fund transfer (EFT) system which will


electronically clear cheques, credit cards, and debit card payments.

No one employee should be handling all stages of a sale

Controls would be put in place to ensure that not one single employee can
request, authorize, verify, or record expenditures

Employees that have access to cash should not be have access to the
financial statements

Bonding employees to ensure coverage in the event of employee theft

Recommendations and Conclusion


Pita Perfection should purchase electronic cash registers. Owners should
complete daily independent verifications of cash with the cashier on shift. Only
cashiers for the shift should have access to the register. Cashiers cannot
complete refunds or discounts without managers/owners approval. Daily bank
deposits should be matched to receipts by the hired accountant. Due to the
recommendations listed above I have to regretfully decline the position as head
cashier/bookkeeper. If an employee has access to cash they should not have
access to the financial records. I would be honoured to be either head cashier or
the bookkeeper.
Question 17:
Date
June 15

Description
Notes Receivable, Tiffney Supply Co.
Sales
Accepted 30-day, 7% notes receivable incl.
Interest. Due July 15

b)

Debit

Credit

16000
16000

Days in June: 15
Days in July: 15
Grace days: 3
Total:

33

Principal Interest rate Number of days 365


16000 0.07 33 365
= 1120 0.0904109
= $101.26
The total amount due July 15 is $ 16101.26.
c)
Date
July 15

Description
Cash

Debit

Credit

16101.26

Notes receivable, Tiffney Supply Co.

16000

Interest earned

101.26

Received payment including interest for


notes receivable

Question 18:
a)
Date
Dec. 31

Description
Bad debt expense

Debit

Credit

2700

Allowance for bad debts

2700

To record accounts receivable estimated to


be uncollectable
b)
Date
Feb. 28

Description
Allowance for bad debts
Accounts receivable, High Tech Inc.
To write off accounts receivable from High
Tech Inc. as uncollectable

Debit

Credit
250
250

c)
Date
Mar. 15

Description

Debit

Accounts Receivable, High Tech Inc.

Credit
250

Allowance for bad debts

250

To reinstate High Tech Inc. account written


off earlier

Mar. 15

Bank

250

Accounts Receivable, High Tech Inc.

250

Payment of account

Question 19:
Periodic Inventory
A physical count of the goods on hand
at the end of the period
Well suited for preparation of annual
statements and not statements for
shorter periods
Used on large quantities of low-priced
merchandise
Does not distinguish between
merchandise that has been sold and
merchandise that has been spoiled or
stolen

Perpetual Inventory
A continuous record of each inventory
purchase and sale is maintained
It is easier to prepare financial
statements for shorter periods since it
is continuous
Used for high unit value items such as
cars
Takes into account possible spoilage,
theft, obsolescence and miscalculation.

Question 20:
a)
Number of Units

Invent
ory,
Januar
y1
First
purcha
se,
March

5600

7420

Uni
t
Cos
t$
67.5
0

Total Cost $

70

(7420*70)= 519400 (SOLD)

(5600*67.50)= 378000 (SOLD)

1
Second
purcha
se,
May 15
Third
purcha
se, July
3
Fourth
purcha
se,
Oct. 25
Goods
Availab
le for
Sale
Units
sold
during
the
year
Invent
ory,
Dec. 31

4780

69.2
5

(4780*69.25)= 331015 (SOLD)

4240

72

(4240*72)=305280 (SOLD)

6400-460 SOLD=5940

73.2
5

(6400*73.25)=468800 (6400460)= 5,940

(5600+7420+4780+4240
+6400)= 28,440

(378000+519400+331015+305280
+468800)= 2,002,495

22500

(378000+519400+331015+305280
+33695)= 1,567,390

=5600+22840-22500=
5,940

5940*73.25= 435,105

Beginning Inventory
Plus: Purchases
Cost of Goods available
for sale
Minus: Ending inventory
Cost of Goods Sold

(5600*67.50)=378,000
(7420*70)+(4780*69.25)+(4240*72)+(6400*73.2
5)=1,624,495
(378000+1624495)=2,002,495
(5940*73.25)=435,105
(2002495-435105)=1,567,390

b)
Number of Units

Invent
ory,
Januar
y1
First
purcha
se,

5600

7420-7080 SOLD = 340

Uni
t
Cos
t$
67.
50

Total Cost $

70

(7420*70)= 519400 (7420340)=7,080 SOLD

(5600*67.50)= 378,000

March
1
Secon
d
purcha
se,
May 15
Third
purcha
se, July
3
Fourth
purcha
se,
Oct. 25
Goods
Availa
ble for
Sale
Units
sold
during
the
year
Invent
ory,
Dec.
31

4780

69.
25

(4780*69.25)= 331,015 (SOLD)

4240

72

(4240*72)=305,280 (SOLD)

6400

73.
25

(6400*73.25)=468,800 (SOLD)

(5600+7420+4780+424
0+6400)= 28,440

(378000+519400+331015+305280+
468800)= 2,002,495

22500

(468800+305280+331015+(7080*70
))=1,600,695

=5600+22840-22500=
5,940

(340*70)+(5600*67.5)=401,800

Beginning Inventory
Plus: Purchases
Cost of Goods available
for sale
Minus: Ending inventory
Cost of Goods Sold

(5600*67.50)=378,000
(7420*70)+(4780*69.25)+(4240*72)+(6400*73.2
5)=1,624,495
(378000+1624495)=2,002,495
(340*70)+(5600*67.5)=401,800
(2002495-401800)=1,600,695

Question 21:
Date
Jan. 1
Apr. 15
June 3
Aug.

Beginning
inventory
Purchased
Purchased
Purchased

Quantit
y
200

Unit
cost $
32.8

Total Cost $

600
800
300

33.4
33.9
34.5

(600*33.4)=20040
(800*33.90=27120
(300*34.5)=10350

(200*32.8)= 6560

12
Oct. 4
Nov.
27
Dec.
25
Total

Purchased
Purchased

900
400

34.7
34.8

(900*34.7)=31230
(400*34.8)=13920

Purchased

300

34.9

(300*34.9)=10470

3500

119690

Average cost: 1196903500 = $34.20/unit


Value of ending inventory: 700$34.20 = $23,940
Cost of goods available for sale
Minus: Ending inventory
Cost of goods sold

119690
(700*34.2)= 23940
(119690-23940)= 95750

Question 22:
a)
Inventory Recorded Dec. 31
FOB Goods not recorded Dec. 31
Total Inventory

300,000
45,000
345,000

b)
Account
Cost of goods sold
Current assets
Total assets
Gross profit
Net income
Owners Equity

Effect
Overstated
Understated
Understated
Understated
Understated
Understated

Question 23:
Capital expenditures
Initial cost of purchase
Cost incurred to increase efficiency of
the asset
Occurs less frequently
Additions/improvements increase
production debited to property, plant or
equipment accounts
Question 24:

Revenue expenditures
Appears on income statement
Cost incurred for maintenance or repair
Occurs more often and is considered
short term
Ordinary repairs/maintenance debits to
Repairs Expense

Date
June 20

Description

Debit

Patents

Credit

254600

Bank

254600

To record cost of patent

Question 25:
a)
Purchase price: building
Legal, administrative and brokerage
fees
Repairs and improvements to building
before use
Building cost

600000
20000

Purchase price: land


Legal, administrative and brokerage
fees
Land cost

150000
5000

Purchase price: machinery &


equipment
PST
Delivery and installation costs
Machinery & equipment cost

556000

Development costs
Registration costs
Trademark cost

1700
950
2650

124000
744000

155000

44480
11120
611600

b)
Date
Sep. 18

Description
Building
Bank
Acquired building

Debit

Credit

744000
744000

Sep. 18

Land

155000

Bank

155000

Acquired land

Date

Description

Debit

Oct. 9

Machinery & Equipment

Credit

611600

Bank

611600

Total cost of machinery & equipment and


installation

Date
Oct. 21

Description

Debit

Trademark

Credit

2650

Bank

2650

To record cost of developing and registering


a trademark

Question 26:
Assets
Accounts receivable
Inventories
Equipment
Accounts payable
Net assets

Book value
56000
93000
42500
-19000
172500

Fair market value


56000
101000
69000
-19000
207000

The goodwill is 303500 207000 = 96500

Date
Mar. 21

Description
Accounts receivable

Debit
56000

Inventories

101000

Equipment

69000

Goodwill

96500

Accounts payable

Credit

19000

Bank

303500

To record assets and liabilities of purchased


business and setting up of goodwill

Question 27:
Amortization = Cost of patent Useful life
60000 5 = 12000
Date
Dec. 9

Description

Debit

Amortization expense

Credit

12000

Patent

12000

To record patent amortization

Question 28:
a)
Inventory Recorded June 30
FOB Goods not recorded June 30
Total Inventory

1,200,000
180,000
1,380,000

b) & c)
Effect of error
Year ended June 30, 2008
Beginning inventory
Ending inventory
Cost of goods sold
Gross profit
Net income
Total assets
Owners equity

NE
U
O
U
U
U
U

Indicate the amount of


error (if any)
0
180000
180000
180000
180000
180000
180000

d) The understatement of inventory in year 1 means that the inventory in year 2


will be understated by $180,000, meaning the net income will be overstated.
Question 29:
Transaction

Result

Financial Statement
affected

Record fictitious sales

Do not record goods


returned from customer

Understate the beginning


inventory

Fail to record amortization


of factory machinery

Record the value of a


trademark at $5000 more
than the actual
development costs

Accounts receivable
will be overstated
Revenue account
will be overstated
Accounts receivable
will be overstated
Revenue account
will be overstates
Cost of goods
available for sale
account will be
understated
Gross profit account
will be understated
Cost of goods sold
account will be
understated
Amortization
expense account will
be understated
Net profits will be
overstated
Asset account will
be overstated

Balance sheet: higher


current assets

Balance sheet: higher


current assets

Income Statement: higher


net income

Balance Sheet: lower


capital assets

Balance sheet: higher


current assets

Question 30:
a)
Year

200
7
200
8

Book value
beginning
of year
25000

Rat
e
40%

Amortization
expense

Accumulated
amortization

Net book value

10000

10000

15000

15000

40%

6000

16000

9000

b) Understating the amortization expense causes the net income in the income
statement to be overstated since expenses are understated. This then results to

an overstatement of the capital assets in the balance sheet since the book value
will be higher.