Chapter 7, Problem 4AP

a.

To determine

Prepare bank reconciliation of Company S as at July 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 S as at July 31.

Company S
Bank Reconciliation
July 31
Ending balance from bank statement		$9,098.55	Balance from general ledger		$8,112.62
ADD:			ADD:
Deposits in transit	$3,358.19		Note payable borrowed from bank	$3,000
Bank error	215.00	3,573.19	Book error	963	3,963.00
		$12,671.74			$12,075.62
LESS:			LESS:
Outstanding checks		$1,251.12	Service charge	$15
			NSF Check	640	$655.00
Reconciled cash balance		$11,420.62	Reconciled cash balance		$11,420.62

Table (1)

Working Notes:

Calculate book error amount.

$\begin{array}{c}\text{Book error add }\left(\text{deduct}\right)\text{ = Amount recorded}–\text{Actual amount}\\ \text{= \$1,070 – \$107}\\ \text{= \$963}\end{array}$

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 charged check to the company’s account would decrease the cash balance per bank. So, company adds the check to 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.
• Note payable that was not recorded by company, is credited to bank account. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
• The accountant has recorded a payment for repairs of $107 as $1,070. So, the cash balance decreased by $963. Therefore, the balance should be added to books, to increase amount of the cash ledger account balance.
• 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 reconciling bank statement and the cash ledger balance, 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.

b.

To determine

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 amount borrowed from bank, but not recorded in the books.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
July	31	Cash			3,000
			Notes Payable			3,000
		(Record amount borrowed by issuing note)

Table (2)

Description:

• Cash is an asset account. The amount is increased because cash is received for the over-paid check, and an increase in asset is debited.
• Notes Payable is a liability account. The amount of the payable is increased, and do liability increased, and an increase in liability is credited.

Prepare journal entry to record book error amount.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
July	31	Cash			963
			Repairs Expense			963
		(Record incorrectly recorded book error amount)

Table (3)

Description:

• Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
• Repairs Expense is an expense account. The expense amount was erroneously recorded, and so cash balance decreased. Hence, expense is reduced by crediting.

Prepare journal entry to record bank service charge.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
July	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.

Prepare journal entry to record NSF check.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
July	31	Accounts Receivable			640
			Cash			640
		(Record NSF as increase in accounts receivable)

Table (5)

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.