Exercise 6-12B Determining the True Cash Balance, Starting with the Unadjusted Book Balance

Internal Control and Accounting for Cash

Exercise 6-12B Determining the True Cash Balance, Starting with the Unadjusted Book Balance

Burson Company had an unadjusted cash balance of $8,120 as of April 30. The company’s bank statement, also dated April 30, included a $200 NSF check written by one of Burson’s customers. There were $1,525 in outstanding checks and $900 in deposits in transit as of April 30. According to the bank statement, service charges were $50, and the bank collected a $500 note receivable for Burson. The bank statement also showed $31 of interest revenue earned by Burson.

Required
Determine the true cash balance as of April 30. (Hint: It is not necessary to use all of the preceding items to determine the true balance.)

Exercise 6-13B Effect of Establishing a Petty Cash Fund

Mountain Timber Company established a $180 petty cash fund on January 1, Year 1.

Required
a. Is the establishment of the petty cash fund an asset source, use, or exchange transaction?
b. Show the establishment of the petty cash fund in a horizontal statements model like the following one:
Assets = Liab. + Equity Rev. − Exp. = Net Inc. Cash Flow
Cash + Petty Cash
c. Record the establishment of the fund in general journal format.

Exercise 6-14B Effect of Petty Cash Events on the Financial Statements

Payton Inc. established a petty cash fund of $150 on January 2. On January 31, the fund contained cash of $8.20 and vouchers for the following cash payments:

• Postage and office supplies $76.30
• Entertainment expense 36.50
• Maintenance expense 25.00

The three distinct accounting events affecting the petty cash fund for the period were (1) establishment of the fund, (2) reimbursements made to employees, and (3) recognition of expenses and replenishment of the fund.

Required
a. Show each of the three events in a horizontal statements model like the following one. In the Cash Flow column, indicate whether the item is an operating activity (OA), investing activity (IA), or a financing activity (FA). Use NA to indicate that an account was not affected by the event.
b. Record the events in general journal format.

Exercise 6-15B Determining the Amount of Petty Cash Expense

Consider the following events:

1. A petty cash fund of $200 was established on April 1, Year 1.
2. Employees were reimbursed when they presented petty cash vouchers to the petty cash custodian.
3. On April 30, Year 1, the petty cash fund contained vouchers totaling $171.40 plus $26.10 of currency.

Required
Answer the following questions:
a. How did the establishment of the petty cash fund affect (increase, decrease, or have no effect on) total assets?
b. What is the amount of total petty cash expenses to be recognized during April?
c. When are petty cash expenses recognized (at the time of establishment, reimbursement, or replenishment)?

Exercise 6-16B Materiality and the Auditor

Sarah Bale is an auditor. Her work at two companies disclosed inappropriate recognition of revenue. Both cases involved dollar amounts in the $100,000 range. In one case, Bale considered the item material and required her client to restate earnings. In the other case, Bale dismissed the misstatement as being immaterial.

Required
Write a memo that explains how a $100,000 misstatement of revenue is acceptable for one company but unacceptable for a different company.