Assignment: Chapter 6 homework 1. eBook Show Me HowShow Me HowShow Me HowShow Me HowShow Me How Cash Equivalents Herrero Corp. invested its excess cash in the following instruments during December 2014: Certificate of deposit, due January 31, 2017 $ 75,000 Certificate of deposit, due March 30, 2015 131,000 Commercial paper, original maturity date February 28, 2015 125,000 Deposit into a money market fund 25,000 Investment in stock 65,000 90-day Treasury bills 100,000 Treasury note, due December 1, 2042 500,000 Required: Determine the amount of cash equivalents that should be combined with cash on the company's balance sheet at December 31, 2014, and for purposes of preparing a statement of cash flows for the year ended December 31, 2014. $ _________________ 2. eBook Internal Control The university drama club is planning a raffle. The president overheard you talking about internal control to another accounting student, so she asked you to set up some guidelines to "make sure" that all money collected for the raffle is accounted for by the club. Required: 1. All of the following are possible guidelines the club should follow to achieve an acceptable level of internal control EXCEPT for: payment by check of any expenses associated with the raffle. segregation of duties for collecting cash, counting and recording cash, and depositing cash in a bank account. establishing an audit committee to review the internal control system. pre numbered tickets. _________________ 2. Which of the following is correct in regards to the president's request that she "be sure" all money is collected and recorded? It is impossible to be completely sure that there are no human errors in counting and handling the cash. It is possible to prevent collusion from occurring if two or more individuals work together to misdirect any of the cash. It is possible to be completely sure that there are no human errors in counting and handling the cash. Fraud will never happen if there is a strong internal control system. _________________ 3. eBook Bank Reconciliation The following information is available to assist you in preparing a bank reconciliation for Calico Corners on May 31: The balance on the May 31 bank statement is $8,432.11. Not included on the bank statement is a $1,250 deposit made by Calico Corners late on May 31. A comparison between the canceled checks returned with the bank statement and the company records indicated that the following checks are outstanding at May 31: No. 123 $23.40 No. 127 145.00 No. 128 210.80 No. 130 69.51 The Cash account on the company's books shows a balance of $9,965.34. The bank acts as a collection agency for interest earned on some municipal bonds held by Calico Corners. The May bank statement indicates interest of $465.00 earned during the month. Interest earned on the checking account and added to Calico Corners' account during May was $54.60. Miscellaneous bank service charges amounted to $50.00. A customer's NSF check in the amount of $168.19 was returned with the May bank statement. A comparison between the deposits listed on the bank statement and the company's books revealed that a customer's check in the amount of $123.45 was recorded on the books during May but was never added to the company's account. The bank erroneously added the check to the account of Calico Closet, which has an account at the same bank. The comparison of deposits per the bank statement with those per the books revealed that another customer's check in the amount of $101.10 was correctly added to the company's account. In recording the check on the company's books, however, the accountant erroneously increased the Cash account by $1,011.00. Required: Enter all amounts rounded to the nearest cent. 1. Prepare a bank reconciliation in good form. Calico Corners Bank Reconciliation May 31 Balance per bank statement, May 31 $ $ No. 123 $ No. 127 No. 128 No. 130 Adjusted balance, May 31 $ Balance per books, May 31 $ $ $ $ Adjusted balance, May 31 $ 2. A friend says to you: I dont know why companies bother to prepare bank reconciliationsit seems a waste of time. Why dont they just do like I do and adjust the Cash account for any difference between what the bank shows as a balance and what shows up in the books? Why does a bank reconciliation should be prepared as soon as a bank statement is received. A bank reconciliation is needed to detect errors and omissions in _________________ records. 4. eBook The Design of Internal Control Documents Motel $49.99 has purchased a large warehouse to store all supplies used by housekeeping departments in the company's expanding chain of motels. In the past, each motel bought supplies from local distributors and paid for the supplies from cash receipts. Required: 1. Compete the following paragraph regarding some potential problems with the old system. The old system of allowing each motel to buy supplies from local distributors offered _________________ internal control. For example, the corporate office _________________ control over the amount paid by each individual operation for its supplies. 2. Complete the following paragraph regarding the design of a purchase requisition form and a receiving report to be used by the housekeeping departments and the warehouse. The purchase requisition form should be in _________________ , with the original filled out by the _________________ department and copies to the _________________ . The receiving report should be in _________________ , with the original filled out by the _________________ department with a copy to the _________________ . 5. eBook Liquidity R Montague and J Capulet distribute films to movie theaters. Following are the current assets for each distributor at the end of the year. (All amounts are in millions of dollars.) Required: As a loan officer for First National Bank of Verona Heights, assume that both companies have come to you asking for a $10 million six-month loan. If you could lend money to only one of the two, which one would it be? Justify your answer by completing a brief memo to the president of the bank. Round any percentages to two decimal places. TO: The President of FNB of Verona Heights FROM: Joe Smith, Loan Officer DATE: X/X/XX SUBJECT: Loan proposals I have reviewed the loan proposals recently submitted by R Montague and J Capulet and have summarized my findings. Because of limited resources available for short-term loans, my recommendation is that we make a six-month $10 million loan to _________________ only. The total current asset positions of the two companies are identical. Each has $33 million in current assets. However, the composition of the current assets differs considerably between the two companies. On the surface, _________________ may appear to be stronger because it has twice the amount of _________________ that _________________ does. However, _________________ is essentially a nonearning asset, and I am skeptical as to why _________________ believes it necessary to maintain such a large sum of cash on hand, and consequently, why it believes it needs to borrow an additional $10 million. The accounts receivable for _________________ is significantly larger than that for _________________ . Assuming that the estimates of bad debts are reasonably reliable, _________________ has a bigger problem with uncollectibles than does _________________ . R Montague has an allowance that is _________________ % of accounts receivable, while J Capulets percentage is _________________ %. In summary, _________________ is a better candidate at the present time for a loan. I recommend that we make a six-month $10 million loan to _________________ at the current market rate of interest. Please call if you need any further details in connection with these two loan requests.