Chapter 6, Problem 2AP

1.

To determine

Journalize the petty cash fund transactions in the books of Corporation K.

Explanation of Solution

Petty cash fund: Petty cash fund is a fund established to pay insignificant amounts like postage, office supplies, and lunches.

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.

Journalize the establishment of petty cash fund transaction on May 1.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
May	1	Petty Cash			300.00
			Cash			300.00
		(Record establishment of petty cash fund)

Table (1)

Description:

• Petty Cash is an asset account. Since cash is deposited in the petty cash account, asset value is increased, and an increase in asset is debited.
• Cash is an asset account. The amount has decreased because cash is transferred to Petty Cash account. The asset is decreased, and a decrease in asset is credited.

Journalize the replenishment of petty cash fund transaction on May 15.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
May	15	Janitorial Expenses			88.00
		Miscellaneous Expenses			53.68
		Postage Expense			53.50
		Advertising Expense			47.15
			Cash Short and Over			4.48
			Cash			237.85
		(Record replenishment of petty cash fund)

Table (2)

• Janitorial Expenses is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Miscellaneous Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Postage Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Advertising Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Cash Short and Over is a stockholders’ equity account. The increase (overage) is credited and decrease (shortage) is debited. Hence, credit Cash Short and Over account with $4.48 indicating excess amount of cash balance.
• Cash is an asset account. Since the expenditures are recognized from petty cash fund petty cash is decreased, and a decrease in asset is credited.

Working Notes:

Calculate cash spent.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$300}\text{.00 – \$62}\text{.15}\\ \text{= \$237}\text{.85}\end{array}$ (1)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Janitorial expenses	$88.00
Miscellaneous Expense	53.68
Postage Expense	53.50
Advertising Expense	47.15
Total expenses	$242.33

Table (3)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash }\left(\text{short}\right)\text{ and over = Total expenses – Cash spent}\\ \text{= \$242}\text{.33 – \$237}\text{.85}\\ \text{= \$4}\text{.48}\end{array}$

Note: Refer to Equation (1) and Table (3) for values and computations of amount of cash spent and total expenses.

Journalize the increase in petty cash fund transaction on May 16.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
May	16	Petty Cash			200
			Cash			200
		(Record increased amount of petty cash fund)

Table (4)

Description:

• Petty Cash is an asset account. Since cash is deposited in the petty cash account, asset value is increased, and an increase in asset is debited.
• Cash is an asset account. The amount has decreased because cash is transferred to Petty Cash account. The asset is decreased, and a decrease in asset is credited.

Journalize the replenishment of petty cash fund transaction on May 31.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
May	31	Postage Expense			147.36
		Mileage Expenses			23.50
		Delivery Expense			34.75
		Cash Short and Over			6.19
			Cash			211.80
		(Record replenishment of petty cash fund)

Table (5)

• Postage Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Mileage Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Delivery Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Cash Short and Over is a stockholders’ equity account. The increase (overage) is credited and decrease (shortage) is debited. Hence, debit Cash Short and Over account with $6.19 indicating less amount of cash balance.
• Cash is an asset account. Since the expenditures are recognized from petty cash fund petty cash is decreased, and a decrease in asset is credited.

Working Notes:

Calculate cash spent.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$500}\text{.00 – \$288}\text{.20}\\ \text{= \$211}\text{.80}\end{array}$ (2)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Postage Expense	$147.36
Mileage Expense	23.50
Delivery Expense	34.75
Total expenses	$205.61

Table (6)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash }\left(\text{short}\right)\text{ and over = Total expenses – Cash spent}\\ \text{= \$205}\text{.61 – \$211}\text{.80}\\ \text{= \$}\left(\text{6}\text{.19}\right)\end{array}$

Note: Refer to Equation (2) and Table (6) for values and computations of amount of cash spent and total expenses.

Journalize the decrease in petty cash fund transaction on May 31.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
May	31	Cash			100
			Petty Cash			100
		(Record decreased amount of petty cash fund)

Table (7)

Description:

• Cash is an asset account. The amount has increased because cash is received from Petty Cash account. The asset is increased, and an increase in asset is debited.
• Petty Cash is an asset account. Since petty cash amount is reduced by transferring to cash account, asset value is decreased, and a decrease in asset is credited.

2.

To determine

Explain the effect of petty cash being not replenished on May 31, on the financial statements of Corporation K.

Explanation of Solution

Effect: If the entry for replenishment of petty cash fund is not recorded, the petty expenses of $211.80 (Equation (2)), for which cash is paid would not be included in the net income and retained earnings (equity), and, hence, both the accounts would be overstated by $211.80.