Acc400 Financial Accounting: Week 2 Assignments (Q3, Q4, E8-5, E9-9, E7-2, P7-2B)

Acc400 Financial Accounting
Week 2 Individual Assignments:
Discussion Questions: 3 and 4
Individual Assignment: Exercise E8-5, E9-9
Learning Team Assignment: E7-2, P7-2B

Discussion Questions:
3. What are the essential features of the allowance method of accounting for bad debts?
4. Lauren Anderson cannot understand why the cash realizable value does not decrease when an uncollectible account is written off under the allowance method. Clarify this point for Lauren.

E8-5
Hachey Company has accounts receivable of $95,100 at March 31, 2007. An analysis of the accounts shows these amounts.
Balance, March 31
Month of Sale 2007 2006
March $65,000 $75,000
February 12,600 8,000
December and January 10,100 2,400
November and October 7,400 1,100
$95,100 $86,500
Credit terms are 2/10, n/30. At March 31, 2007, there is a $2,200 credit balance in Allowance for Doubtful Accounts prior to adjustments. The company uses the percentage of receivables basis for estimating uncollectible accounts.
Estimated Percentage
Age of Accounts Uncollectible
Current 2%
1–30 days past due 7
31–90 days past due 30
Over 90 days 50

Instructions:
1. Determine the total estimated uncollectibles.
2. Prepare the adjusting entry at March 31, 2007, to record bad debts expense.
3. Discuss the implications of the changes in the aging schedule from 2006 to 2007.

E9-9
For several years, a number of Food Lion, Inc., grocery stores were unprofitable. The company closed, and continues to close, some of these locations. It is apparent that the company will not be able to recover the cost of the assets associated with the closed stores. Thus, the current value of these impaired assets must be written down (see the Case in Point on page 381).
A recent Food Lion income statement reports a $9.5 million charge against income pertaining to the write-down of impaired assets.

Instructions:
a. Explain why Food Lion must write down the current carrying value of its unprofitable stores.
b. Explain why the recent $9.5 million charge to write down these impaired assets is considered a noncash expense.

E7-2
Culotti’s Pizza operates strictly on a carryout basis. Customers pick up their orders at a counter where a clerk exchanges the pizza for cash. While at the counter, the customer can see other employees making the pizzas and the large ovens in which the pizzas are baked.

Instructions
Identify the six principles of internal control and give an example of each principle that you might observe when picking up your pizza. (Note: It may not be possible to observe all the principles.)

P7-2B
The board of trustees at a local church is concerned about the internal accounting controls pertaining to the offering collections made at weekly services. They ask you to serve on a three-person audit team with the internal auditor of the university and a CPA who has just joined the church. At a meeting of the audit team and the board of trustees you learn the following.
1. The church’s board of trustees has delegated responsibility for the financial management and audit of the financial records to the finance committee. This group prepares the annual budget and approves major disbursements but is not involved in collections or recordkeeping. No audit has been made in recent years because the same trusted employee has kept church records and served as financial secretary for 15 years. The church does not carry any fidelity insurance.
2. The collection at the weekly service is taken by a team of ushers who volunteer to serve for 1 month. The ushers take the collection plates to a basement office at the rear of the church. They hand their plates to the head usher and return to the church service. After all plates have been turned in, the head usher counts the cash received. The head usher then places the cash in the church safe along with a notation of the amount counted. The head usher volunteers to serve for 3 months.
3. The next morning the financial secretary opens the safe and recounts the collection. The secretary withholds $150 – $200 in cash, depending on the cash expenditures expected for the week, and deposits the remainder of the collections in the bank. To facilitate the deposit, church members who contribute by check are asked to make their checks payable to “Cash.”
4. Each month the financial secretary reconciles the bank statement and submits a copy of the reconciliation to the board of trustees. The reconciliations have rarely contained any bank errors and have never shown any errors per books.

Instructions
1. Indicate the weaknesses in internal accounting control in the handling of collections.
2. List the improvements in internal control procedures that you plan to make at the next meeting of the audit team for:
a. the ushers
b. the head usher
c. the financial secretary
d. the finance committee.
3. What church policies should be changed to improve internal control
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