ACC-112 (Test 2) Chapter 8

Revision Notes

Prepared by: Sanjay Gupta

 ACC112 (Test 2) Chapter 8

Cash and Internal Controls

Basic principle on internal control over cash is that all payments should be by
check. Only exception to this rule is Petty Cash Payments, i.e. small expenses
that can be paid in cash. For this purpose the company sets up a Petty Cash
Fund to make small payments. Cash payments for small expenses are made
from this petty cash fund. The expense receipts are stored and at the end of
accounting period, the accounting entries passed for all expenses met out of
petty cash fund. The petty cash fund is replenished with cash by the amount of
expense incurred out of the fund.

Accounting entries for Petty Cash Fund

1: Entry for setting up of Petty Cash Fund
Date Account Title and Explanation Debit Credit
2015
Jan 1 Petty Cash XXXX
Cash XXXX
(to establish a petty cash fund)

2: Entry to record expense from Petty Cash Fund

Date Account Title and Explanation Debit Credit
2015
Jan 31 Miscellaneous expenses XXXX
Merchandise inventory XXXX
Delivery expense XXXX
Office supplies expense XXXX
Cash XXXX
(to reimburse petty cash)

3: Increasing or Decreasing a petty cash fund

Date Account Title and Explanation Debit Credit
2015
Dec 31 Petty Cash XXXX
Cash XXXX
(to increase the petty cash fund account)
 ACC112 (Test 2) Chapter 8

Step 4: Cash Over and Short

Date Account Title and Explanation Debit Credit
2015
Dec 31 Miscellaneous expense XXXX
Cash Over and Short XXXX
Cash XXXX
(to reimburse petty cash)

Bank Reconciliation Statement

Balance as per Bank Statement Credit: XXXX
Timing differences
Add: Deposits made in the bank but not
Credited in Bank Statement (or deposits
in transit) + XXXX

Less: Checks issued but not debited in

Bank Statement (outstanding checks) (-) XXXX
Adjusted bank balance XXXX (A)

Book Balance Debit: XXXX

Add: Collections directly deposited in
Bank XXXX
Interest earned XXXX + XXXX

Less: Charges and fees (-) XXXX

Adjusted book balance XXXX (B)

Adjusted bank balance must equal Adjusted book balance (A = B)

 ACC112 (Test 2) Chapter 8

Practice Questions

1. The Cash Over and Short account:

A. Is used to record a credit balance in the cash account.
B. Is an income statement account used for recording the income effects of cash overages and cash
shortages from errors in making change and/or from errors in processing petty cash transactions.
C. Is not necessary in a computerized accounting system.
D. Can never have a debit balance.
E. Can never have a credit balance.

2. At the end of the day, the cash register's record shows $1,250, but the count of cash in the cash
register is $1,245. The correct entry to record the cash sales is
A. Debit Cash $1,245; Credit Sales $1,245.
B. Debit Cash $1,245; debit Cash Over and Short $5; credit Sales $1,250.
C. Debit Cash $1,250; credit Sales $1,250.
D. Debit Cash $1,250; credit Sales $1,245, credit Cash Over and Short $5.
E. Debit Cash Over and Short $5, credit Sales $5.

3. At the end of the day, the cash register tape shows $1,000 in cash sales but the count of cash in
the register is $1,035. The proper entry to account for this excess includes a:
A. Credit to Cash for $35.
B. Debit to Cash for $35.
C. Credit to Cash Over and Short for $35.
D. Debit to Cash Over and Short for $35.
E. Debit to Petty Cash for $35.

4. The entry necessary to establish a petty cash fund should include:

A. A debit to Cash and a credit to Petty Cash.
B. A debit to Cash and a credit to Cash Over and Short.
C. A debit to Petty Cash and a credit to Cash.
D. A debit to Petty Cash and a credit to Accounts Receivable.
E. A debit to Cash and a credit to Petty Cash Over and Short.
 ACC112 (Test 2) Chapter 8

5. The entry to record reimbursement of the petty cash fund for postage expense should include:
A. A debit to Postage Expense.
B. A debit to Petty Cash.
C. A debit to Cash.
D. A debit to Cash Short and Over.
E. A debit to Supplies.

6. When a petty cash fund is in use:

A. Expenses paid with petty cash are recorded when the fund is replenished.
B. Petty Cash is debited when funds are replenished.
C. Petty Cash is credited when funds are replenished.
D. Expenses are not recorded.
E. Cash is debited when funds are replenished.

7. In reimbursing the petty cash fund:

A. Cash is debited.
B. Petty Cash is credited.
C. Petty Cash is debited.
D. Appropriate expense accounts are debited.
E. No expenses are recorded.

8. Assume that the custodian of a $450 petty cash fund has $62.50 in coins and currency plus
$382.50 in receipts at the end of the month. The entry to replenish the petty cash fund will include:
A. A debit to Cash for $377.50.
B. A credit to Cash Over and Short for $5.00.
C. A debit to Petty Cash for $382.50.
D. A credit to Cash for $387.50.
E. A debit to Cash for $387.50.

9. A company plans to decrease a $200 petty cash fund to $75. The current balance in the account
includes $45 petty cash payment in receipts and $165 in currency. The entry to reduce the fund will
include a:
A. Debit to Cash Short and Over for $10.
B. Debit to Cash for $90.
C. Debit to Miscellaneous Expenses for $35.
D. Credit to Petty Cash for $165.
E. Credit to Cash for $90.
 ACC112 (Test 2) Chapter 8

10. A company had $43 missing from petty cash that was not accounted for by petty cash receipts.
The correct procedure is to:
A. Debit Cash Over and Short for $43.
B. Credit Cash Over and Short for $43.
C. Debit Petty Cash for $43.
D. Credit Petty Cash for $43.
E. Credit Cash for $43.

11. Martha Company has an established petty cash fund in the amount of $500. The fund was last
reimbursed on November 30. At the end of December, the fund contained the following petty cash
receipts:

If, in addition to these receipts, the petty cash fund contains $301 of cash, the journal entry to
reimburse the fund on December 31 will include:
A. A debit to Transportation-In of $73.
B. A debit to Transportation-Out of $73.
C. A credit to Office Supplies of $66.
D. A credit to Cash Over and Short of $10.
E. A debit to Cash Over and Short of $10.

12. An analysis that explains any differences between the checking account balance according to the
depositor's records and the balance reported on the bank statement is a(n):
A. Internal audit.
B. Bank reconciliation.
C. Bank audit.
D. Trial reconciliation.
E. Analysis of debits and credits.

13. On a bank reconciliation, an unrecorded debit memorandum for printing checks is:
A. Noted as a memorandum only.
B. Added to the book balance of cash.
C. Deducted from the book balance of cash.
D. Added to the bank balance of cash.
E. Deducted from the bank balance of cash.
 ACC112 (Test 2) Chapter 8

14. Outstanding checks refer to checks that have been:

A. Written, recorded, sent to payees, and received and paid by the bank.
B. Written and not yet recorded in the company books.
C. Held as blank checks.
D. Written, recorded on the company books, sent to the payee, but have not yet been paid by the
bank.
E. Issued by the bank.

15. On a bank reconciliation, the amount of an unrecorded bank service charge should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Noted in memorandum form only.

16. A check that was outstanding on last period's bank reconciliation was not among the cancelled
checks returned by the bank this period. As a result, in preparing this period's reconciliation, the
amount of this check should be:
A. Added to the book balance of cash.
B. Deducted from the book balance of cash.
C. Added to the bank balance of cash.
D. Deducted from the bank balance of cash.
E. Ignored in preparing the period's bank reconciliation.

17. A company made a bank deposit on September 30 that did not appear on the bank statement
dated as of September 30. In preparing the September 30 bank reconciliation, the company should:
A. Deduct the deposit from the bank statement balance.
B. Send the bank a debit memorandum.
C. Deduct the deposit from the September 30 book balance and add it to the October 1 book
balance.
D. Add the deposit to the book balance of cash.
E. Add the deposit to the bank statement balance.
 ACC112 (Test 2) Chapter 8

18. If a check correctly written and paid by the bank for $794 is incorrectly recorded in the
company's books for $749, how should this error be treated on the bank reconciliation?
A. Subtract $45 from the bank's balance.
B. Add $45 to the bank's balance.
C. Subtract $45 from the book balance.
D. Add $45 to the book balance.
E. Subtract $45 from the bank's balance and add $45 to the book's balance.

19. During the month of September, Norris Industries issued a check in the amount of $845 to a
supplier on account. The check cleared the bank during September. The disbursement was recorded
incorrectly as $854. The journal entry to correct this mistake when discovered will include:
A. A debit to Accounts Payable for $854.
B. A credit to Cash for $854.
C. A credit to Cash for $9.
D. A credit to Accounts Payable for $9.
E. A debit to Cash for $49.

20. In the process of reconciling Marks Enterprises' bank statement for September, Mr. Marks
compiles the following information:

The adjusted cash balance per the books on September 30 is:

A. $6,900
B. $8,160
C. $4,600
D. $6,520
E. $5,840
 ACC112 (Test 2) Chapter 8

21. Which of the following events would cause a bank to debit a depositor's account?
A. The depositor authorizes the bank to charge the depositor's account $50 for new checks.
B. The bank collects a note receivable and related interest on the depositor's behalf.
C. The depositor determines there are outstanding checks drawn on the account at month-end.
D. The depositor determines there are deposits in transit on the account at month-end.
E. The bank determines it incorrectly charged the depositor's account twice for the monthly service
charge in a previous month.
 ACC112 (Test 2) Chapter 8

Solutions Key

1. B
2. B
3. C
4. C
5. A
6. A
7. D
8. D
9. B
10.A
11.E
12.B
13.C
14.D
15.B
16.D
17.E
18.C
19.D
20.D
21.A
 ACC112 (Test 2) Chapter 8

22. On August 17, at the end of the day, the cash register's record shows $957, but the count of cash
in the register is $965. Prepare the general journal entry to record the day's cash sales.

Answer

23. A company established a petty cash fund of $100 on September 1. On September 10, the petty
cash fund was replenished when there was $16 remaining and there were petty cash receipts for:
office supplies, $27; transportation-in on inventory purchased, $32; and postage, $22. On September
15, the petty cash fund was increased to $125 in total. Record the above transactions in general
journal form.

Answer
 ACC112 (Test 2) Chapter 8

24. A petty cash fund was originally established with a check for $150. In the petty cash fund on
December 31 (the period-end), you find the following:

Prepare the general journal entry to record the replenishment of the petty cash fund on December
31.

Answer
 ACC112 (Test 2) Chapter 8

25. A company established a $400 petty cash fund by issuing a check to the custodian on October 1.
On October 15, the petty cash fund was replenished and increased to $1,000 in total. The contents
of the petty cash fund at the time of the October 15 replenishment were:

Prepare the general journal entry to record both the reimbursement and the increase of the petty
fund on October 15.

Answer
 ACC112 (Test 2) Chapter 8

26. On November 1, a company established a $90 petty cash fund. On November 12, the petty cash
fund contains $3 in cash and the following paid petty cash receipts: transportation-in on
merchandise inventory $14.25; postage, $34.50; and office supplies, $36. Give the entry to
reimburse the fund and to increase its amount to $150 on November 12.

Answer
 ACC112 (Test 2) Chapter 8

27. A company established a petty cash fund in February of the current year and experienced the
following transactions affecting the fund during February:

Prepare the journal entries to establish the find, reimburse the fund and to reduce its amount on
February 28.

Answer
 ACC112 (Test 2) Chapter 8

28. Following are seven items a through g that would cause Xavier Company's book balance of cash
to differ from its bank statement balance of cash.
a. A service charge imposed by the bank.
b. A check listed as outstanding on the previous period's reconciliation and still outstanding at the
end of this month.
c. A customer's check returned by the bank is marked "Not Sufficient Funds(NSF)".
d. A deposit that was mailed to the bank on the last day of the current month and is unrecorded on
this month's bank statement.
e. A check paid by the bank at its correct $190 amount was recorded in error in the company's Check
Register at $109.
f. An unrecorded credit memorandum indicated that bank had collected a note receivable for Xavier
Company and deposited the proceeds in the company's account.
g. A check was written in the current period that is not yet paid or returned by the bank.
Indicate where each item a through g would appear on Xavier Company's bank reconciliation by
placing its identifying letter in the parentheses in the proper section of the form below.
 ACC112 (Test 2) Chapter 8

Answer
 ACC112 (Test 2) Chapter 8

29. The following information is available for the Avisa Company for the month of November.
a. On November 30, after all transactions have been recorded, the balance in the company's Cash
account has a balance of $27,202.
b. The company's bank statement shows a balance on November 30 of $29,279.
c. Outstanding checks at November 30 include check #3030 in the amount of $1,525 and check
#3556 in the amount of $1,459.
d. A credit memo included with the bank statement indicates that the bank collected $780 on a
noninterest-bearing note receivable for Avisa. The bank deducted a $10 collection fee, and credited
the remainder of $770 to Avisa's account.
e. A debit memo included with the bank statement shows a $67 NSF check from a customer, J.
Brown.
f. A deposit placed in the bank's night depository on November 30 totaled $1,675, and did not
appear on the bank statement.
g. Examination of the checks on the bank statement with the entries in the accounting records
reveals that check #3445 for the payment of an account payable was correctly written for $2,450,
but was recorded in the accounting records as $2,540.
h. Included with the bank statement was a debit memorandum in the amount of $25 for bank
service charges. It has not been recorded on the company's books.
1. Prepare the November bank reconciliation for the Avisa Company.
2. Prepare the general journal entries to bring the company's book balance of cash into conformity
with the reconciled balance as of November 30.
 ACC112 (Test 2) Chapter 8

Answer

2
 ACC112 (Test 2) Chapter 8

30. Brown Company's bank statement for September 30 showed a cash balance of $1,350. The
company's Cash account in its general ledger showed a $995 debit balance. The following
information was also available as of September 30.
a. A $125 debit memoranda is included with the bank statement and dealt with a customer's check
for $100 marked NSF and returned to Brown Company by the bank. In addition, the bank charged
the company's a $25 processing fee.
b. The September 30 cash receipts, $1,250, were placed in the bank's night depository after banking
hours on that date and this amount did not appear on the September 30 bank statement.
c. A $15 debit memorandum for checks printed by the September 30 bank was included with the
canceled checks.
d. Outstanding checks amounted to $1,145.
e. A customer's note for $900 was collected by the bank. A collection fee of $25 was deducted by the
bank and the difference was deposited in the account.
f. Included with the canceled checks was a check for $275, drawn on another company, Browne Inc.
1. Prepare a bank reconciliation as of September 30.
2. Prepare any necessary adjusting journal entries necessary as a result of the bank reconciliation.
 ACC112 (Test 2) Chapter 8

Answer

1.

2.
 ACC112 (Test 2) Chapter 8

31. The following information is available to reconcile Litner Co.'s book balance of cash with its bank
statement cash balance as of April 30. The April 30 cash balance according to the accounting records
is $78,356, and the bank statement cash balance for that date is $83,525.
a. The bank erroneously cleared a $480 check against the account in April that was not issued by
Litner. The check documentation included with the bank statement indicates the check was actually
issued by Lightning Co.
b. On April 30, the bank issued a credit memorandum for $53 interest earned on Litner's account.
c. When the April checks are compared with entries in the accounting records, it is found that Check
No. 1828 had been correctly drawn for $1,530 to pay for advertising but was erroneously entered in
the accounting records as $1,350.
d. A credit memorandum indicates that the bank collected $10,000 cash on a note receivable for
Litner, deducted a $30 collection fee, and credited the balance to the company's Cash account.
Litner did not record this transaction before receiving the statement.
e. A debit memorandum of $895 is enclosed with the bank statement for an NSF check for $870
received from a customer. The bank assessed a $25 fee for processing it.
f. Litner's April 30 daily cash receipts of $5,102 were placed in the bank's night depository on that
date, but do not appear on the April 30 bank statement.
g. Litner's April 30 cash disbursements journal indicates that Check No. 1837 for $584 and Check No.
1840 for $1,219 were both written and entered in the accounting records, but are not among the
canceled checks.
1. Prepare the bank reconciliation for this company as of April 30.
2. Prepare the journal entries necessary to bring the company's book balance of cash into conformity
with the reconciled cash balance as of April 30.
 ACC112 (Test 2) Chapter 8

Answer

1.

2.
 ACC112 (Test 2) Chapter 8

32. A company established a petty cash fund in April of the current year and experienced the
following transactions affecting the fund during April. Prepare journal entries to establish the fund
on April 1, to replenish it on April 25, and to record the increase in the fund on April 25.

Answer
 ACC112 (Test 2) Chapter 8

33. The following information is available to reconcile Cloy Company's book balance of cash with its
bank statement cash balance as of June 30. The June 30 cash balance according to the accounting
records is $58,542, and the bank statement cash balance for that date is $68,047.
a. The bank erroneously cleared a $395 check against the account in June that was not issued by
Cloy. The check documentation included with the bank statement indicates the check was actually
issued by Clare Co.
b. On June 30, the bank issued a credit memorandum for $35 interest earned on Cloy's account.
c. When the June checks are compared with entries in the accounting records, it is found that Check
No. 1727 had been correctly drawn for $1,450 to pay for advertising but was erroneously entered in
the accounting records as $1,540.
d. A credit memorandum indicates that the bank collected $9,000 cash on a note receivable for Cloy,
deducted a $30 collection fee, and credited the balance to the company's Cash account. Cloy did not
record this transaction before receiving the statement.
e. A debit memorandum of $895 is enclosed with the bank statement for an NSF check for $870
received from a customer. The bank assessed a $25 fee for processing it.
f. Cloy's June 30 daily cash receipts of $6,325 were placed in the bank's night depository on that
date, but do not appear on the June 30 bank statement.
g. Cloy's June 30 cash disbursements journal indicates that Check No. 1737 for $4,830 and Check No.
1740 for $3,280 were both written and entered in the accounting records, but are not among the
canceled checks.
h. A debit memorandum for $85.00 indicates the bank deducted the annual lock box fee for the
company.
1. Prepare the bank reconciliation for this company as of June 30.
2. Prepare the journal entries necessary to bring the company's book balance of cash into conformity
with the reconciled cash balance as of June 30.
 ACC112 (Test 2) Chapter 8

Answer

1.

2.