Chapter 5, Problem 2CP

(1)

To determine

To prepare: Bank reconciliation of Company KM, as atApril 30

Explanation of Solution

Bank reconciliation: Bank statement is prepared by bank. The company maintains its own records from its perspective. This is why the cash balance per bank and cash balance per books seldom agree. Bank reconciliation is the statement prepared by company to remove the differences and disagreement between cash balance per bank and cash balance per books.

Prepare bank reconciliation of Company KM, as at April 30.

Company KM
Bank Reconciliation
April 30
Updates to Bank Statement			Updates to Company’s Books
Ending cash balance per bank statement	$5,775	Ending cash balance per books			$6,200
Additions:		Additions:
Deposits in transit	500
	6,275				6,200
Deductions:		Deductions:
Bank error	100	EFT payment		$200
Outstanding checks	300	NSF check		100
Up-to-date ending cash balance	$5,875	Bank service charge		25	325
		Up-to-date ending cash balance			$5,875

Table (1)

Working Notes:

Calculate bank error amount.

$\begin{array}{c}\text{Bank error amout = Amount recorded–Actual amount}\\ \text{= \$1,000 – \$1,100}\\ \text{= \$}\left(\text{100}\right)\end{array}$

Description:

• The deposits which are not recorded by the bank are referred to as deposits in transit. Since the deposits in transit are not reflected on the bank statement, the company should add deposits in transit to cash balance per bank, while preparation of bank reconciliation statement.
• The incorrectly written check would increase the cash balance per bank. So, company deducts the amount of $100 from balance per bank while bank reconciliation preparation.
• Outstanding checks are the checks that are issued by the company, but not yet paid by the bank. When the check is issued for payment, the company deducts the cash balance immediately. But the bank deducts only when the cash is paid for the issued check. So, company deducts the cash balance per bank to remove the differences.
• Electronic funds transfer (EFT) being collected by bank, is credited to bank account. But the company is not aware of it. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
• Banks deduct the service charge for the services rendered like lock box rental, or printed checks. But the company is not aware of such deductions. So, company deducts the cash balance per books while bank reconciliation preparation.
• While bank reconciliation, the NSF check should be deducted from the cash balance per book. This is because the bank could not collect funds from the customer’s bank due to lack of funds. But being recorded as Accounts Receivable previously, the balance should be deducted from books, to increase the Accounts Receivable account.

(2)

To determine

To prepare: Adjusting journal entries that arise due to bank reconciliation

Explanation of Solution

Journal entry: Journal entry is a set of economic events which can be measured in monetary terms. These are recorded chronologically and systematically.

Debit and credit rules:

• Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in stockholders’ equity accounts.
• Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.

Prepare journal entry to record EFT payment made by bank.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
April	30	Accounts Payable			200
			Cash			200
		(To record payment made by bank)

Table (2)

Description:

• Accounts Payable is a liability account. The amount has decreased because the amount to be paid is decreased, and a decrease in liabilities is debited.
• Cash is an asset account. The amount is decreased because cash is paid, and a decrease in asset is credited.

Prepare journal entry to record bank service charge.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
April	30	Office Expense			25
			Cash			25
		(To record bank service charge)

Table (3)

Description:

• Office Expenses is an expense account and the amount is increased because bank has charged service charges for safety box rent. Expenses decrease Equity account and decrease in Equity is debited.
• Cash is an asset account. The amount is decreased because bank service charge is paid, and a decrease in asset is credited.

Prepare journal entry to record NSF check.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
April	30	Accounts Receivable			100
			Cash			100
		(To record NSF check)

Table (3)

Description:

• Accounts Receivable is an asset account. The bank has not collected the amount from the customer due to insufficient funds, which was earlier recorded as a receipt. As the collection could not be made, amount to be received increased. Therefore, increase in asset would be debited.
• Cash is an asset account. The amount is decreased because bank could not collect amount due to insufficient funds in customer’s account, and a decrease in asset is credited.

(3)

To determine

To indicate: The balance in Cash account, after posting the reconciliation entries

Answer to Problem 2CP

The balance in Cash account, after posting the reconciliation entries is $5,875.

Explanation of Solution

After the three adjustments (Refer to the bank reconciliation statement in Part 1), the balance in Cash account is $5,875 $\left(\$6,200–\$200–\$100–\$25\right)$.

Conclusion

Hence, the balance in Cash account, after posting the reconciliation entries is $5,875.

(4)

To determine

To indicate: The balance to be reported in the balance sheet as at April 30, after including the balance in petty cash on hand

Answer to Problem 2CP

The balance to be reported in the balance sheet as at April 30, after including the balance in petty cash on hand is $6,875.

Explanation of Solution

After adding the balance in petty cash on hand account of $1,000 to the updated balance in Cash account of $5,875, the balance to be reported in the balance sheet as at April 30 is $6,875 $\left(\$5,875+\$1,000\right)$.

Conclusion

Hence, the balance to be reported in the balance sheet as at April 30, after including the balance in petty cash on hand is $6,875.