Chapter 5, Problem 5.3PB

(1)

To determine

The amount of deposits in transit as at September 31

Explanation of Solution

Deposits-in-transit: The checks that are deposited and recorded by the company, but not yet recorded by the bank are referred to as deposits-in-transit.

Deposits that should be included in bank reconciliation: As per the information, the deposits in transit as at September 31, is $21,000, which is deposited on September30, but the bank has not recorded.

Conclusion

Hence, the deposits in transit as at September 31, is $21,000.

(2)

To determine

To list: The outstanding checks at September 31

Explanation of Solution

Outstanding checks: Outstanding checks are the checks that are issued by the company, but not yet paid by the bank.

Determine the amount of outstanding checks as at September 31.

Particulars	Amount ($)
Outstanding check	$500
Outstanding check	6,000
Amount of outstanding checks as at September 31	$6,500

Table (1)

Description: The other checks that were issued by company, were paid by the bank.

Conclusion

Hence, the amount of outstanding checks at September 31 was $6,500.

(3)

To determine

To prepare: Bank reconciliation of Company T, as at September 31

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 T, as at September 31.

Company T
Bank Reconciliation
September 31
Updates to Bank Statement		Updates to Company’s Books
Ending cash balance per bank statement	$108,430	Ending cash balance per books	$123,410
Additions:		Additions:
Deposits in transit	21,000	Interest earned	60
	129,430		123,470
Deductions:		Deductions:
Outstanding checks	6,500	NSF check	500
Up-to-date ending cash balance	$122,930	Bank service charge	40
		Up-to-date ending cash balance	$122,930

Table (2)

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.
• 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.
• Interest earned on checking account is credited by bank to the bank account of which the company is not aware of. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
• 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.
• 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.

(4)

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 interest earned.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
September	31	Cash			60
			Interest Revenue			60
		(To record interest earned)

Table (3)

Description:

• Cash is an asset account. The amount is increased because credited the interest earned on checking account, and an increase in asset is debited.
• Interest Revenue is a revenue account. Revenuesincrease Equity account and an increase in Equity is credited.

Prepare journal entry to record NSF check.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
September	31	Accounts Receivable			500
			Cash			500
		(To record NSF check)

Table (4)

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.

Prepare journal entry to record bank service charge.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
September	31	Office Expense			40
			Cash			40
		(To record bank service charge)

Table (4)

Description:

• Office Expenses is an expense account and the amount is increased because bank has charged service charges. 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.

(5)

To determine

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

Answer to Problem 5.3PB

The balance in Cash account, after posting the reconciliation entries is $122,930.

Explanation of Solution

After the three adjustments (Refer to the bank reconciliation statement in Part 3), the balance in Cash account is $122,930 $\left(\$123,410+\$60–\$500–\$40\right)$.

Conclusion

Hence, the balance in Cash account, after posting the reconciliation entries is $122,930.

(6)

To determine

To indicate: The balance to be reported in the balance sheet as at September31, after including the balance of $200 in petty cash on hand

Answer to Problem 5.3PB

The balance to be reported in the balance sheet as at September 31, after including the balance in petty cash on hand is $123,310.

Explanation of Solution

After adding the balance in petty cash on hand account of $300 to the updated balance in Cash account of $95,070, the balance to be reported in the balance sheet as at September31 is $123,130 $\left(\$122,930+\$200\right)$.

Conclusion

Hence, the balance to be reported in the balance sheet as at September31, after including the balance in petty cash on hand is $123,130.