Chapter 7, Problem 4PA

(a)

To determine

Prepare bank reconciliation of Company CB as at October 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.

The adjusted cash balance per bank, and the adjusted cash balance per books of Company CB is $4,830

Prepare bank reconciliation of Company CB as at October 31.

Company CB
Bank Reconciliation
October 31
Particulars	Amount ($)	Amount ($)
Cash balance as per bank statement		8,980
Add:
Deposit of October 31, not recorded by bank	1,050
Bank error in charging check as $730 instead of $370	360	1,410
Less:
Outstanding checks		5,560
Adjusted cash balance per bank		4,830
Cash balance as per books		3,795
Add:
Proceeds of note collected by bank, including $120 interest		2,120
Less:
Checks returned because of insufficient funds	880
Bank service charges	25
Error in recording check	180	1,035
Adjusted cash balance per books		4,830

Table (1)

Working Note 1: Calculate the bank error

$\begin{array}{c}\text{Bank error amout = Actual amount–Amount recorded}\\ \text{= \$370 – \$730}\\ \text{= \$360}\end{array}$

Working Note 2: Determine the balance per company’s book, October 31.

$\begin{array}{c}\text{Balance per company's books, October 31 = }\left(\begin{array}{l}\text{C}\text{}\text{ash balance, October 1 }\\ \text{+ Cash deposits in October }\\ \text{– Checks written in October }\end{array}\right)\\ =\$5,140+\$39,175-\$40,520\\ =\$3,795\end{array}$

• ■ 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.
• ■ Notes receivable being collected by bank, is credited to bank account. But the company is not aware of it. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
• ■ Error in recording checks and banks deducting 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.

(b)

To determine

Prepare adjusting journal entries for Company CB.

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 account receivable collected by bank.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
October	31	Cash		2,120
		Notes Receivable			2,000
		Interest Revenue			120
		(To record receivable collected by bank)

Table (2)

• ■ Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
• ■ Notes Receivable is an asset account. The amount has decreased because the amount to be received is collected by the bank, and, a decrease in assets should be credited.
• ■ Interest revenue is a revenue account and increases the stockholders’ equity. Thus, increases in the stockholders’ equity should be credited.

Prepare journal entry to record book error amount.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
May	31	Accounts Payable  - R Co.		180
		Accounts receivables – VC Co.		880
		Miscellaneous expenses		25
		Cash			1,085
		(To record amount under-payable by accountant)

Table (3)

• ■ Accounts Payable is a liability account. The under-paid payable is paid, and so, amount to be paid is decreased. A decrease in liability is debited.
• ■ Accounts receivable is an asset account. It is increased and thus, current asset is increased and debited.
• ■ Miscellaneous expenses are expenses account and decrease the stockholders’ equity. Thus, decrease in the stockholders’ equity should be debited.
• ■ Cash is an asset account. The amount is decreased to pay the under-paid check, and a decrease in asset is credited.

(c)

To determine

Report the amount of cash in the balance sheet on October 31.

Explanation of Solution

Thus, the adjusted balance from the bank reconciliation should be reported as cash on the October 31 balance sheet for CB Co. is $4,830.