Solution Manual for Fundamental Financial Accounting

Concepts 9th Edition by Thomas Edmonds Edmonds ISBN

0078025907 9780078025907
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SOLUTIONS TO EXERCISES - SERIES B - CHAPTER 6

EXERCISE 6-1B

a. SOX refers to the Sarbanes-Oxley Act of 2002.

b. COSO stand for The Committee of Sponsoring Organizations of the

Treadway Commission. It is the de facto standard by which SOX
compliance is judged. Section 404 of Sarbanes-Oxley requires a
statement of management’s responsibility for establishing and
maintaining adequate internal control over financial reporting by
public companies. This section includes an assessment of the
controls and the identification of the framework used for the
assessment.

c. The five components of COSO’s framework are as follows:

1. Control Environment. The integrity and ethical values of the
company, including its code of conduct, involvement of the
board of directors, and other actions that set the tone of the
organization.
2. Risk Assessment. Management’s process of identifying
potential risks that could result in misstated financial statements
and developing actions to address those risks.
3. Control Activities. These are the activities usually thought of as
“the internal control.” They include such things as separation of
duties, account reconciliations, and information processing
controls that are designed to safeguard assets and enable an
organization to timely prepare reliable financial statements.
4. Information and Communication. The internal and external
reporting process, and includes an assessment of the
technology environment.

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 5. Monitoring. Assessing the quality of a company’s internal
control over time and taking actions as necessary to ensure it
continues to address the risk of the organization.

d. The Enterprise Risk Management (ERM)-An Integrated Framework is

the expanded version of COSO’s Internal Control framework. It
introduces an enterprise-wide approach to risk management.

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EXERCISE 6-2B

a. The two categories of internal controls are accounting controls and

administrative controls.

Accounting controls: Procedures designed to safeguard the assets

and ensure that the accounting records contain reliable information.

Administrative controls: Procedures that concern the evaluation of

performance and the assessment of the degree of compliance with
company policies and public law.

b. The purpose of internal controls is to prescribe policies and

procedures to be used to provide reasonable assurance that the
objectives of an enterprise will be accomplished. They are designed
to safeguard the assets of a business.

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EXERCISE 6-3B

Some of the internal control features that should be included in the memo
to Stand Oden:
 Have as much separation of duties as possible. The manager should
prepare the deposit of cash receipts collected by the sales personnel.
Oden should periodically check these amounts. If the manager is in
charge of writing the checks, then Oden should sign each check and
verify the documentation. One of the sales personnel should check in
inventory and the manager should check the receiving reports and
verify the billing.
 Be sure that assets are adequately insured.
 Be sure that quality employees are hired.
 Require that all employees take vacations.
 Use prenumbered documents.

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EXERCISE 6-4B

a. The discrepancy was most likely caused by theft by Sally Knox, the
parts department manager. It is unlikely that sloppy recordkeeping
could account for this much of a difference. The manager could have
been involved in several types of dishonest behavior. She could have
presented phony invoices for payment to a fictitious company, or sold
some of the parts and not recorded the sale. Any of these activities
would cause this type of discrepancy.

b. Separation of duties is one internal control procedure that could have

helped prevent this type of theft. If the company was so small that it
had only one employee in the parts department, the owner must be very
involved in that department, checking invoices, inventory, receiving
reports and other documentation.

Also, the owner should have insisted that Sally take regular vacations.

Bonding the employees would help to insure against theft loss.

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EXERCISE 6-5B

 Receipts should be promptly written for all cash received and the funds
deposited timely in a bank or other financial institution.
 All cash disbursements should be made by check and all check
numbers accounted for.
 All checks should require dual signatures and proper supporting
documents.
 The bank account should be reconciled on a monthly basis. Cash on
hand should be kept to a minimum.
 Cash handling and cash record-keeping duties should be separated as
well as authorization for cash disbursements.

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EXERCISE 6-6B

Internal Controls related to Equipment include:

1. Quality of Employees
2. Bonded Employees
3. Authority and Responsibility
4. Physical Controls
5. Performance Evaluations

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EXERCISE 6-7B
a. & c.
Hibbert Supplies
Statements Model

Assets = Liab. + S. Equity Rev.  Exp. = Net Inc. Cash Flow

Cash + Acct. Rec. = +
(a) (300) + 300 = NA + NA NA  NA = NA (300) OA
(c) 325 + (300) = NA + 25 25  NA = 25 325 OA

b. Asset exchange.

c. See financial statements model above. The $25 fee is miscellaneous

income.

d. Asset Exchange is $300 and Asset Source is $25.

e.
Event Account Titles Debit Credit
a. Accounts Receivable 300
Cash 300
c. Cash 325
Accounts Receivable 300
Miscellaneous Income 25

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EXERCISE 6-8B

Book Added or
Reconciling Items Balance Subtracted?
Adjusted?
Automatic Debit for Utility Bill Yes 
Charge for Printing New Checks Yes 
NSF Check from Customer Yes 
ATM Fee Yes 
Outstanding Checks No NA
Interest Revenue Earned on the Account Yes +
Deposits in Transit No NA
Service Charge Yes 

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EXERCISE 6-9B

Bank Balance Added or

Reconciling Items Adjusted? Subtracted?
Credit Memo No NA
ATM Fee No NA
Petty Cash Voucher No NA
NSF Check from Customer No NA
Interest Revenue No NA
Bank Service Charge No NA
Outstanding Checks Yes 
Deposits in Transit Yes +
Debit Memo No NA

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EXERCISE 6-10B
a.
Bank Reconciliation
Unadjusted Bank Balance 5/31/2016 $26,100
Add: Deposit in Transit 6,981
Less: Outstanding Check (5,720)
True Cash Balance 5/31/2016 $27,361

Unadjusted Book Balance 5/31/2016 $27,350

Add: Credit Memo for Interest Earned 36
Less: Debit Memo for Service Charge (25)
True Cash Balance 5/31/2016 $27,361

b.
Date Account Titles Debit Credit
Adj 1 Cash 36
Interest Revenue 36
Adj 2 Bank Service Charge Expense 25
Cash 25

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EXERCISE 6-11B

Unadjusted Bank Balance, 8/31 $35,200

Plus: Deposits in 3,750
Transit
2,350
Less: Outstanding (2,120)
Check (5,611)
True Cash Balance, 8/31 $36,830

EXERCISE 6-12B

Unadjusted Book Balance, 4/30 $8,120

Add: Interest Earned $ 31
Note Collected by Bank 500 531

Less: NSF Check 200

Service Charges 50 (250)
True Cash Balance, 4/30 $8,401

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EXERCISE 6-13B

a. Asset exchange.

b.
Mountain Timber Company
Statements Model

Assets = Liab. + S. Equity Rev.  Exp. = Net Inc. Cash Flow

Petty
Cash + Cash
(180) + 180 = NA + NA NA  NA = NA NA

c.
Mountain Timber Company
General Journal

Date Account Titles Debit Credit

Jan. 1 Petty Cash 180

Cash 180

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EXERCISE 6-14B
a.
Payton, Inc.
Statements Model
Assets = S. Equity Rev.  Exp. = Net Inc. Statement
Petty of
No. Cash + Cash = Ret. Cash Flows
Earn.
1. (150.00) + 150.00 = NA NA  NA = NA NA
2. NA + NA = NA NA  NA = NA NA
3. (141.80)* + NA = (141.80) NA  141.80 = (141.80) (141.80) OA

*$150.00  $8.20 = $141.80

b.
Payton, Inc.
General Journal Entries

Event No. Account Titles Debit Credit

1. Petty Cash 150.00
Cash 150.00
2. No Entries
3. Postage and Office Expense 76.30
Entertainment Expense 36.50
Maintenance Expense 25.00
Cash Short and Over 4.00
Cash 141.80

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EXERCISE 6-15B

a. No effect; this is an asset exchange transaction.

b. Net charge to expense is $173.90; expenses will be debited for

$171.40, the amount of the vouchers; cash short and over will be
credited for $2.50.

c. Replenishment.

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EXERCISE 6-16B

The memo should contain some of the following information:

Something is considered material if knowing about the problem would

affect the decisions of an average prudent investor. Thus, the concept is
subjective.

Whether a $100,000 error is material depends on the total amount of

revenue involved. If the total revenue was only $1 million, the $100,000
would probably be considered material because it is 10% of revenue. On
the other hand, if the total revenue were $20 million, the $100,000 would
probably not be considered material.

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SOLUTIONS TO PROBLEMS - SERIES B - CHAPTER 6

PROBLEM 6-17B

a. Separation of duties would have helped to prevent this type of act.

The authority function, check writing function, and check delivery
function should have been separated.

b. Again, separation of duties would help to prevent this type of fraud.

Mr. Stewart should not authorize the purchase of supplies and also
verify their receipt.

c. Better control procedures could help eliminate this type of act.

Require an authorization for any discounts that are given. Also,
management should periodically observe procedures used at the
cash register. Shortages in inventory can be reduced by having
another employee checking sales receipts with the merchandise a
customer carries from the store (like Sam’s Club).

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PROBLEM 6-18B
a.
Lewis Supply Co.
Bank Reconciliation
October 31, 2016
Unadjusted Bank Balance, October 31, 2016 $21,400
Add: Deposit in Transit 2,600
Less: Outstanding Checks (2,075)
True Cash Balance, October 31, 2016 $21,925

Unadjusted Book Balance, October 31, 2016 $18,400

Add: Error in recording check for repairs 3,600
Less: Debit Memo for new checks (75)
True Cash Balance, October 31, 2016 $21,925

b.
General Journal
Ref. Account Titles Debit Credit
1. Cash 3,600
Repairs Expense 3,600
2. Office Supplies Expense 75
Cash 75

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PROBLEM 6-19B

Woods Sports Inc.

Bank Reconciliation
April 30, 2016
Unadjusted Bank Balance, April 30, 2016 $13,750
Add: Deposits in Transit $3,600
Bank Error 800 4,400
Less: Outstanding Checks #1901 265
#1920 650
#1921 1,200 (2,115)
True Cash Balance, April 30, 2016 $16,035

Unadjusted Book Balance, April 30, 2016 $15,295*

Add: Credit memo for note collected by bank 1,100
Less: Collection Fee 50
Bank Service Charge 45
Error in recording payment for office
supplies expense 90
NSF Checks 175 (360)
True Cash Balance, April 30, 2016 $16,035

*Unadjusted cash balance per books is computed as follows:

x + $1,100  $360 = $16,035
x = $15,295

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PROBLEM 6-20B

China Imports
General Journal
Event Account Titles Debit Credit
a. Cash 60
Interest Revenue 60
b. Supplies 80
Cash 80
c. Bank Service Charge Expense 45
Cash 45
d. Theft Loss 800
Cash 800
e. No Entry
f. Cash 4,000
Accounts Receivable 4,000
g. No Entry
h. No Entry
i. Accounts Receivable 525
Cash 525

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PROBLEM 6-21B
a.
Pyle Garage
Bank Reconciliation
March 31, 2016
Unadjusted Bank Balance, March 31, 2016 $16,000.00
Add: Deposit in Transit 2,000.00
Less: Outstanding Checks #1469 $1,500.00
1470 102.00 (1,602.00)
True Cash Balance, March 31, 2016 $16,398.00

Unadjusted Book Balance, March 31, 2016 $16,868.00

Add: Credit Memo for Collection of Accounts
Receivable 175.00
Less: Error in Recording Check #1468 $630.00
Debit Memo for Service Charges 15.00 (645.00)
True Cash Balance, March 31, 2016 $16,398.00

b.
Account Titles Debit Credit
Cash 175.00
Accounts Receivable 175.00
Equipment 630.00
Cash 630.00
Bank Service Charge Expense 15.00
Cash 15.00

6-52
PROBLEM 6-22B

Assets = Liabilities + Stockholders’ Equity

Event Type of Common Retained
Number Event Stock + Earnings
1. AE + NA NA NA
2. AU  NA NA 
3. AU  NA NA 
4. AE + NA NA NA
5. AS + NA NA +

6-53
PROBLEM 6-23B
a.
BBQ Express
Bank Reconciliation
May 31, 2016

Unadjusted Bank Balance, May 31, 2016 $22,000

Add: Deposit in Transit 4,250
Less: Outstanding Checks (4,600)
True Cash Balance, May 31, 2016 $21,650

Unadjusted Book Balance, May 31, 2016 $25,000

Add: Credit Memo for Collection of Notes
Receivable 1,815
Less: Debit Memo for Service Charge $ 30
Debit Memo for Loan Payment 1,000 (1,030)
Subtotal 25,785
Stolen Cash (4,135)
True Cash Balance, May 31, 2016 $21,650

b. Correcting the amount of outstanding checks from $465 to $4,600

reveals a true cash balance of $21,650. Given the adjusted book
balance of $21,650, there must be $4,135 of cash missing, (i.e., $25,785
 $21,650). The discrepancy was hidden by understating the amount of
outstanding checks, thereby raising the bank balance to equal the
incorrect book balance.

c. Separation of duties and/or oversight by the owner could help to

prevent this type of act. In small businesses with few employees, it
may not be possible to have all the accounting functions separate. In
this case, it is necessary for the owner to take an active role in the
accounting of the business.

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PROBLEM 6-24B
a.
Marsh Company
General Journal
Event Account Titles Debit Credit
1. Petty Cash 250
Cash 250
2. No Entry
3. Meals Expense 120
Postage Expense 21
Delivery Expense 93
Cash Short and Over 3
Cash* 237
*$250  $13 = $237

b. The cash shortage will be reported on the income statement as

miscellaneous expense.

c.
Event Number Type of Event
1. AE
2. No Effect
3. AU

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PROBLEM 6-24B (cont.)
d.
Effect of Transactions on Financial Statements

Assets = Liab. + S. Equity Rev.  Exp. = Net Inc. Cash Flow

No. Cash + Petty Cash =
1. (250) + 250 = NA + NA NA  NA = NA NA
2. NA + NA = NA + NA NA  NA = NA NA
3. (237) + NA = NA + (237) NA  237 = (237) (237) OA

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PROBLEM 6-25B

a. Since Ms. Stevens was not able to complete the audit procedures,
she should issue a disclaimer stating that she was unable to
complete the necessary audit procedures.

b. The three types of audit opinions are:

1. Unqualified opinion – This is the most desirable type of

opinion. This type of opinion indicates that the auditors
believe that the financial statements are in compliance with
GAAP.
2. Adverse opinion – This is the most undesirable type of
opinion. This type of opinion means that something in the
financial statements is not in compliance with GAAP and the
auditors think this would be material to the average prudent
investor.
3. Qualified opinion – This type of opinion means that for the
most part the financial statements are in compliance with
GAAP. The auditor will then state the issue that they have
reservations about.

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