Chapter 7, Problem 5PB

(1)

To determine

Prepare the Bank reconciliation of Company SI as at July 31, 20Y5.

Answer to Problem 5PB

The adjusted cash balance per bank, and the adjusted cash balance per books of Company SI is $11,494.0

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.

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 bank reconciliation of Company SI as at July 31, 20Y5.

Company SI
Bank Reconciliation
July 31, 20Y5
Particulars	Amount ($)	Amount ($)
Cash balance as per bank statement		11,601.41
Add:
Deposit of July 31, not recorded by bank		1,177.84
Less: Outstanding checks
No : 613	137.50
No : 628	837.70
No : 633	310.08	1,285,.28
Adjusted cash balance per bank		11,494.00
Cash balance as per books		7,664.00
Add:
Notes and interest receivable collected by bank	4,160.00
Error in July 23 deposit	18.00
Error in recording check no.627	63.00	4,241.00
Less:
Checks returned because of insufficient funds	375.00
Bank service charges	36.00	411.00
Adjusted cash balance per books		11,494.00

Table (1)

Working Notes:

Determine the balance per company’s book, June 30

$\begin{array}{c}\text{Balance per Bank account, July 31 = }\left(\begin{array}{l}\text{C}\text{}\text{ash balance, July 1 }\\ \text{+ July receipts }\\ \text{– July disbursments}\end{array}\right)\\ =\$9,578.00+\$6,465.42-\$8,379.42\\ =\$7,664.00\end{array}$

Explanations for the transaction are as follows:

• ■ 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.

(2)

To determine

Prepare the adjusting journal entries for Company SI.

Explanation of Solution

Prepare journal entry to record account receivable collected by bank.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
July	31	Cash		4,241.00
		Notes Receivable			4,000
		Interest Revenue			160.00
		Sales			18.00
		Accounts payable			63.00
		(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.
• ■ Sales is revenue and increases the stockholders’ equity. So, credit the same.
• ■ Accounts payable is a liability and decreased as there is receipt of cash. So, credit accounts payable account.  

Prepare journal entry to record book error amount.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
June	30	Accounts receivables		375.00
		Miscellaneous expenses		36.00
		Cash			411.00
		(To record amount under-payable by accountant)

Table (3)

• ■ 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.

(3)

To determine

Determine the amount of cash in the balance sheet on June 30.

Explanation of Solution

Thus, the adjusted balance from the bank reconciliation should be reported as cash on the July 31 balance sheet for SI is $11,494.00

(4)

To determine

Explain the manner in which the error should be included in the bank reconciliation and the manner in which it should be corrected.

Explanation of Solution

Error amount of $1,610 ($1,800 – $180) is the cancelled check. It is added in the “balance according to bank statement” on the bank reconciliation statement. Thus, the cancelled checks are being presented in the bank. When the check is presented to the bank, bank balance is corrected.