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Quick Study 8-6

1. For each of the following items, indicate whether its amount (i) affects the bank or book side of a bank reconciliation and (ii) represents an addition or a subtraction in a bank reconciliation:

a. Outstanding checks- affects the bank side and represents a subtraction in a bank reconciliation
b. Debit memos- affects the book side and represents a subtraction in a bank reconciliation
c. NSF checks- affects the book side and represents a subtraction in a bank reconciliation
d. Unrecorded deposits- affects the bank side and represents an addition in a bank reconciliation
e. Interest on cash balance- affects book side and represents an addition in a bank reconciliation
f. Credit memos- affects the book side and represents an addition in a bank reconciliation
g. Bank service charges- affects the book side and represents a subtraction in a bank reconciliation

2. Which of the items in part 1 require an adjusting journal entry?
*The items in part 1 that require an adjusting journal entry would be interest on cash balance, NSF checks and bank service charges.

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Exercise 8-3

Bemis Company is a rapidly growing start-up business. Its record-keeper, who was hired one year ago, left town after the company’s manager discovered that a large sum of money had disappeared over the past six months. An audit disclosed that the record-keeper had written and signed several checks made payable to her fiancé and then recorded the checks as salaries expense. The fiancé, who cashed the checks but never worked for the company, left town with the record-keeper. As a result, the company incurred an uninsured loss of $84,000. Evaluate Bemis’s internal control system and indicate which principles of internal control appear to have been ignored.

*Bemis Company should have established responsibilities better for the company by giving