Chapter 6, Problem 4PA

1.

To determine

Prepare the bank reconciliation for Company B, as on August 31, 20--.

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 the bank reconciliation for Company B, as on August 31, 20--.

Company B
Bank Reconciliation
August 31, 20--
Bank statement balance		$1,323
Add: Deposit in transit		599
		1,922
Deduct: Outstanding checks:
Number: 928	$150
Number: 929	292	442
Adjusted bank statement balance		$1,480
Ledger balance of cash		$1,563
Add:
Error in recording Check Number: 925		27.00
		1,590
Deduct:
NSF check from customer	$95
Bank service and collection charges	15	110
Adjusted ledger balance of cash		$1,480

Table (1)

Working Notes:

Calculate book error in recording Check Number: 925.

$\begin{array}{c}\text{Book error add }\left(\text{deduct}\right)\text{ = Amount recorded}–\text{Actual amount}\\ \text{= \$74 – \$47}\\ \text{= \$27}\end{array}$

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.
• 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 bank statement balance to remove the differences.
• The accountant has recorded the check number: 925 for $47 as $74. So, the ledger cash balance decreased by $27. Therefore, the balance should be added to ledger cash balance.
• 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 ledger cash balance, 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 ledger cash balance while bank reconciliation preparation.

2.

To determine

Prepare the 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 book error amount.

Date		Accounts and Explanation		Post. Ref.	Debit ($)	Credit ($)
August	31	Cash			27
			Accounts Payable			27
		(Record reduction in over-paid payable)

Table (2)

Description:

• Cash is an asset account. When the cash is paid, the Cash account is credited by $74. The account is now debited with $27, to reverse the previously credited effect and reduce the amount of over-paid check to $47.
• Accounts Payable is a liability account. When the accounts payable is paid, the Accounts Payable account is debited by $74. The account is now credited with $27, to reverse the previously debited effect and reduce the amount of over-paid check to $47.

Prepare journal entry to record NSF check.

Date		Account Titles and Explanation		Post. Ref.	Debit ($)	Credit ($)
August	31	Accounts Receivable			95
			Cash			95
		(Record NSF as increase in accounts receivable)

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.

Prepare journal entry to record bank service charge.

Date		Account Titles and Explanation		Post. Ref.	Debit ($)	Credit ($)
August	31	Miscellaneous Expense			15
			Cash			15
		(Record payment of bank service charges)

Table (4)

Description:

• Miscellaneous Expense 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.

3.

To determine

Prepare the bank form to compute the adjusted bank balance.

Explanation of Solution

Prepare the bank form to compute the adjusted bank balance.

Figure (1)