Chapter 6, Problem 2BP

1.

To determine

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

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 January 3.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
January	3	Petty Cash			150.00
			Cash			150.00
		(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 January 14.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
January	14	Office Supplies Expenses			14.29
		Merchandise Inventory			19.60
		Repairs Expense			38.57
		Miscellaneous Expenses			12.82
		Cash Short and Over			2.44
			Cash			87.72
		(Record replenishment of petty cash fund)

Table (2)

• Office Supplies Expense is an expense account. Expenses decrease value of stockholders’ equity account, and a decrease in equity is debited.
• Merchandise Inventory is an asset account. Transportation-in charges are related to merchandise, so these expenses are charged to merchandise inventory in perpetual inventory system. Hence, value of asset is increased, and an increase in asset is debited.
• Repairs Expense 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.
• 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 $2.44 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.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$150}\text{.00 – \$62}\text{.28}\\ \text{= \$87}\text{.72}\end{array}$ (1)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Office Supplies Expenses	14.29
Merchandise Inventory	19.60
Repairs Expense	38.57
Miscellaneous Expenses	12.82
Total expenses	$85.28

Table (3)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash }\left(\text{short}\right)\text{ and over = Total expenses – Cash spent}\\ \text{= \$85}\text{.28 – \$87}\text{.72}\\ \text{= \$}\left(\text{2}\text{.44}\right)\end{array}$

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 January 15.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
January	15	Petty Cash			50
			Cash			50
		(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 January 31.

Date		Account Titles and Explanations		Post. Ref.	Debit ($)	Credit ($)
January	31	Advertising Expense			50.00
		Postage Expenses			48.19
		Delivery Expense			78.00
		Cash Short and Over			6.46
			Cash			182.65
		(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 $6.46 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.

$\begin{array}{c}\text{Cash spent = Petty cash fund balance – Cash in the fund}\\ \text{= \$200}\text{.00 – \$17}\text{.35}\\ \text{= \$182}\text{.65}\end{array}$ (2)

Calculate cash short and over amount.

Step 1: Calculate the total of expenses.

Particulars	Amount ($)
Advertising Expense	$50.00
Postage Expense	48.19
Delivery Expense	78.00
Total expenses	$176.19

Table (6)

Step 2: Calculate the cash and short over amount.

$\begin{array}{c}\text{Cash }\left(\text{short}\right)\text{ and over = Total expenses – Cash spent}\\ \text{= \$176}\text{.19 – \$182}\text{.65}\\ \text{= \$}\left(\text{6}\text{.46}\right)\end{array}$

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

Journalize the increase in petty cash fund transaction on January 31.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
January	31	Petty Cash			50
			Cash			50
		(Record increased amount of petty cash fund)

Table (7)

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.

2.

To determine

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

Explanation of Solution

Effect: If the entry for replenishment of petty cash fund is not recorded, the petty expenses of $182.65 (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 $182.65.