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Question CA7-9

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Intermediate Accounting (Kieso)
Found in: Page 378

Short Answer

(Receivables Management) As the manager of the accounts receivable department for Beavis Leather Goods, Ltd., you recently noticed that Kelly Collins, your accounts receivable clerk who is paid $1,200 per month, has been wearing unusually tasteful and expensive clothing. (This is Beavis’s first year in business.) This morning, Collins drove up to work in a brand new Lexus.

Naturally suspicious by nature, you decide to test the accuracy of the accounts receivable balance of $192,000 as shown in the ledger. The following information is available for your first year (precisely 9 months ended September 30, 2017) in business.

(1) Collection from Customers

$188,000

(2) Merchandise Purchased

360,000

(3) Ending merchandise inventory

90,000

(4) Goods are marked to sell ay 40% above cost.

Instructions

Assuming all sales were made on account, compute the ending accounts receivable balance that should appear in the ledger, noting any apparent shortage. Then, draft a memo dated October 3, 2017, to Mark Price, the branch manager, explaining the facts in this situation. Remember that this problem is serious, and you do not want to make hasty accusations.

There is a difference in the balance of accounts receivables of $2,000.

See the step by step solution

Step by Step Solution

Definition of Merchandise

The goods bought by the business entity with the main purpose of generating revenue by re-selling them are known as merchandise.

Ending Accounts Receivables

Particular

Amount $

Merchandise purchased

$360,000

Less: Ending merchandise

(90,000)

Merchandise Sold

$270,000

Particular

Amount $

The sales price of merchandise sold

$378,000

Less: Cash collected from customers

(188,000)

Ending Accounts receivables

$190,000

Memo

To: Mark Price, (Branch Manager)

From: Accounting Major

Date: 3 October 2017

Subject: Discrepancy in the Accounts Receivables Account

The routine test performed for ending the balance of the accounts receivables discrepancy of $2,000 was found. This difference must be provided with immediate attention.

The ledger shows a balance of $192,000, but the actual balance of the accounts receivable is $190,000.

Individuals must not be blamed using single evidence only. The business entity must carry out further investigation to protect the company’s assets.

Apart from me, only the accounting clerk has access to the accounts receivables account. I will have more close inspection of the work of the clerk. But the company must appoint an auditor to look into the situation.

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