1- Identifying and correcting internal control weakness

Suppose The Right Rig Dealership is opening a regional office in Omaha. Cary Regal, the office manager, is designing the internal control system. Regal proposes the follow-ing procedures for credit checks on new customers, sales on account, cash collections, and write-offs of uncollectible receivables:

• The credit department runs a credit check on all customers who apply for credit. When an account proves uncollectible, the credit department authorizes the write-off of the accounts receivable.

Cash receipts come into the credit department, which separates the cash received from the customer remittance slips. The credit department

lists all cash receipts by customer name and amount of cash received.

The cash goes to the treasurer for deposit in the bank. The remittance slips go to the accounting department for posting to customer

accounts.

The controller compares the daily deposit slip to the total amount posted to customer accounts. Both amounts must agree.

Recall the components of internal control. Identify the internal control weakness in this situation, and propose a way to correct

Problems

P10-32A Recording lump-sum asset purchases, depreciation, and disposals

Sep. 1 Gain $193,250

Ellie Johnson Associates surveys American eating habits. The company's accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each depreciable asset. During 2018, Ellie Johnson Associates completed the following transactions:

Jan. 1Purchased office equipment, $113,000. Paid $80,000 cash and financed the remainder with a note payable.

Apr. 1Acquired land and communication equipment in a lump-sum purchase. Total cost was $310,000 paid in cash. An independent appraisal

valued the land at $244,125 and the communication equipment at $81,375.

Sep. 1Sold a building that cost $520,000 (accumulated depreciation of $285,000 through December 31 of the preceding year). Ellie Johnson

Associates received $420,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a

40-year useful life and a residual value of $25,000.

Dec. 31Recorded depreciation as follows: Communication equipment is depreciated by the straight-line method over a five-year life with zero

residual value.

Office equipment is depreciated using the double-declining-balance method over five years with a $1,000 residual value.

Record the transactions in the journal of Ellie Johnson Associates.

P10-38B Recording lump-sum asset purchases, depreciation, and disposals

Sep. 1 Gain $163,250

Whitney Plumb Associates surveys American eating habits. The company's accounts include Land, Buildings, Office Equipment, and Communication Equipment, with a separate Accumulated Depreciation account for each asset. During 2018, Whitney Plumb completed the following transactions:

Jan. 1Purchased office equipment, $117,000. Paid $77,000 cash and financed the remainder with a note payable.

Apr. 1Acquired land and communication equipment in a lump-sum purchase. Total cost was $350,000 paid in cash. An independent appraisal

valued the land at $275,625 and the communication equipment at $91,875.

Sep. 1Sold a building that cost $520,000 (accumulated depreciation of $285,000 through December 31 of the preceding year). Whitney

Plumb received $390,000 cash from the sale of the building. Depreciation is computed on a straight-line basis. The building has a 40-

year useful life and a residual value of $25,000.

Dec. 31Recorded depreciation as follows: Communication equipment is depreciated by the straight-line method over a five-year life with zero

residual value. Office equipment is depreciated using the double-declining-balance method over five years with a $2,000 residual value

Record the transactions in the journal of Whitney Plumb Associates.

P10-40B Accounting for intangibles

Goodwill $210,000

Core Telecom provides communication services in Iowa, Nebraska, the Dakotas, and Montana. Core purchased goodwill as part of the acquisition of Surety Wireless Company, which had the following figures:

Book value of assets$ 700,000

Market value of assets1,000,000

Market value of liabilities510,000

1. Journalize the entry to record Core's purchase of Surety Wireless for $280,000 cash plus a $420,000 note payable.

2. What special asset does Core's acquisition of Surety Wireless identify? How should Core Telecom account for this asset after acquiring Surety Wireless? Explain in detail.