ACC 205 Week 4

ACC 205 Week 4

Fraud Case 7-1 - ACC205 Principles of Accounting I - AU

Fraud Case 7-1

Levon Helm was a kind of one-man mortgage broker. He would drive around Tennessee looking for homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second mortgage for cash on the barrelhead. Helm bought low and sold high, making sizable profits. Being a small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank reconciliations. At some point, Patterson started borrowing from the business and concealing her transactions by booking phony expenses. She intended to pay it back someday, but she got used to the extra cash and couldnt stop. By the time the scam was discovered, she had drained the company of funds that it owed to many of its investors. The company went bankrupt, Patterson did some jail time, and Helm lost everything.

Requirements

1. What was the key control weakness in this case?

2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What can they do to compensate for this?

P7-31A Accounting for petty cash transactions

LO 9 [20-30 minutes]

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Suppose that on June 1, Rockin Gyrations, a disc jockey service, creates a petty cash

fund with an imprest balance of $500. During June, Michael Martell, fund custodian,

signs the following petty cash tickets:

Petty Cash Ticket No. Item Amount

1 Postage for package received $20

2 Decorations and refreshments 25

for office party

3 Two boxes of stationery 35

4 Printer cartridges 15

5 Dinner money for sales manager 75

5 entertaining a customer

On June 30, prior to replenishment, the fund contains these tickets plus cash of

$325. The accounts affected by petty cash payments are Office supplies expense,

Entertainment expense, and Postage expense.

Requirements

1. On June 30, how much cash should this petty cash fund hold before it is

replenished?

1. Journalize all required entries to (a) create the fund and (b) replenish it. Include

explanations.

1. Make the July 1 entry to increase the fund balance to $475. Include an explanation,

and briefly describe what the custodian does.

Week 4 DQ2 Receivables - ACC205 Principles of Accounting I AU

Receivables. Discuss the allowance method and the direct write-off method of accounting for bad debts. When is the expense for uncollected accounts receivable recognized under each method?