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Chapter 8: Q1SE (page 466)

Ensuring internal control over the collection of receivables Consider internal control over receivables collections. What job must be withheld from a company鈥檚 credit department in order to safeguard its cash? If the credit department does perform this job, what can a credit department employee do to hurt the company?

Short Answer

Expert verified

Internal controls are the systems used by an organization to manage risk and diminish the occurrence of fraud.

Step by step solution

01

Step 1: Segregation of Duties- Job must be withheld from a company’s credit department

The company should proper segregate the duties to credit appraisal department and treasury department.

The credit department should not have access to cash collection in order to safeguard the cash.

02

Consequence on the company is credit department perform cash collection

  1. Since the credit department has access to cash and can authorize written-off, this may have a chance that credit department employees, could pocket money received from a customer.
  2. The employee could then label the customer鈥檚 account as uncollectible, and the company would stop billing that customer.
  3. In this scenario, the employee may have covered his or her theft.

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Most popular questions from this chapter

Unique Media Sign Incorporated sells on account. Recently, Unique reported the following figures:

2018

2017

Net Credit Sales

\( 594,920

\)602,000

Net Receivables at end of year

38,500

47,100

Requirements

1. Compute Unique鈥檚 days鈥� sales in receivables for 2018. (Round to the nearest day.)

2. Suppose Unique鈥檚 normal credit terms for a sale on account are 2/10, net 30. How well does Unique鈥檚 collection period compare to the company鈥檚 credit terms? Is this good or bad for Unique?

At January 1, 2018, Hilltop Flagpoles had Accounts Receivable of \(28,000, and Allowance for Bad Debts had a credit balance of \)3,000. During the year, Hilltop Flagpoles recorded the following:

a. Sales of \(185,000 (\)164,000 on account; \(21,000 for cash). Ignore Cost of Goods Sold.

b. Collections on account, \)135,000.

c. Write-offs of uncollectible receivables, $2,300.

Requirements

1. Journalize Hilltop鈥檚 transactions that occurred during 2018. The company uses the allowance method.

2. Post Hilltop鈥檚 transactions to the Accounts Receivable and Allowance for Bad Debts T-accounts.

3. Journalize Hilltop鈥檚 adjustment to record bad debts expense assuming Hilltop estimates bad debts as 10% of accounts receivable. Post the adjustment to the appropriate T-accounts.

4. Show how Hilltop Flagpoles will report net accounts receivable on its December 31, 2018, balance sheet

Delta Watches completed the following selected transactions during 2018

and 2019:2018

Dec. 31 Estimated that bad debts expense for the year was 2% of credit sales of

\(450,000 and recorded that amount as expense. The company uses the

allowance method.

31 Made the closing entry for bad debts expense.

2019

Jan. 17 Sold merchandise inventory to Mack Smith, \)400, on account. Ignore Cost of

Goods Sold.

Jun. 29 Wrote off Mack Smith鈥檚 account as uncollectible after repeated efforts to

collect from him.

Aug. 6 Received \(400 from Mack Smith, along with a letter apologizing for being so

late. Reinstated Smith鈥檚 account in full and recorded the cash receipt.

Dec. 31 Made a compound entry to write off the following accounts as uncollectible:

Cam Carter, \)1,400; Mike Venture, \(1,200; and Russell Reeves, \)400.

31 Estimated that bad debts expense for the year was 2% on credit sales of

\(510,000 and recorded the expense.

31 Made the closing entry for bad debts expense.

Requirements

1. Open T-accounts for Allowance for Bad Debts and Bad Debts Expense, assuming

the accounts begin with a zero balance. Record the transactions in the general journal

(omit explanations), and post to the two T-accounts.

2. Assume the December 31, 2019, balance of Accounts Receivable is \)136,000.

Show how net accounts receivable would be reported on the balance sheet at

that date.

Question: On June 6, Lakeland Bank & Trust lent $80,000 to Stephan Stow on a 30-day, 9% note.

Requirements

1. Journalize for Lakeland the lending of the money on June 6.

2. Journalize the collection of the principal and interest at maturity. Specify the date Round to the nearest dollar

Question: On December 1, Kyle Corporation accepted a 60-day, 9%, $12,000 note receivable from J. Michael in exchange for his account receivable.

Requirements

1. Journalize the transaction on December 1.

2. Journalize the adjusting entry needed on December 31 to accrue interest revenue. Round to the nearest dollar.

3. Journalize the collection of the principal and interest at maturity. Specify the date. Round to the nearest dollar.
See all solutions

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