Chapter 7, Problem 7.11E

(a)

To determine

The amount of deposits-in-transit for Incorporation P as at August 31, 2017

Answer to Problem 7.11E

The amount of deposits-in-transit for Incorporation P as at August 31, 2017 is $7,800.

Explanation of Solution

Deposits-in-transit: The checks that are deposited and recorded by the depositor, but not yet recorded by the bank are referred to as deposits-in-transit.

Compute the deposits in transit for Incorporation P as at August 31, 2017.

Particulars	Amount ($)	Amount ($)
Receipts as per company in August		$74,000
Deposits as per bank statement, August	$71,000
Less: Deposits in transit as per July 31 reconciliation	4,800	66,200
Amount of deposits in transit as at August 31, 2017		$7,800

Table (1)

(b)

To determine

The amount of checks outstanding for Incorporation P as at August 31, 2017.

Answer to Problem 7.11E

The amount of checks outstanding for Incorporation P as at August 31, 2017 was $9,752.

Explanation of Solution

Outstanding checks: Outstanding checks are the checks that are issued by the company, but not yet paid by the bank.

Compute outstanding checks for Incorporation P as at August 31, 2017.

Particulars	Amount ($)	Amount ($)
Disbursements recorded by company in  August		$73,570
Add: Error amount		360
Corrected total disbursements		73,930
Checks cleared by bank in August	$68,678
Less: Outstanding checks as per July 31 reconciliation	4,500
Total checks cleared by bank in August		64,178
Outstanding checks as at August 31, 2017		$9,752

Table (2)

Working Notes:

Calculate book error amount.

$\begin{array}{c}\text{Book error amout = Actual amount}–\text{Amount recorded}\\ \text{= \$400 – \$40}\\ \text{= \$360}\end{array}$

(c)

To determine

To prepare: Bank reconciliation of Incorporation P as at August 31, 2017.

Answer to Problem 7.11E

The adjusted cash balance per bank, and the adjusted cash balance per books of Incorporation P is $18,740.

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 Incorporation P as at August 31, 2017.

Incorporation P
Bank Reconciliation
August 31, 2017
Cash balance as per bank statement, August 31, 2017		$20,692
Add: Deposits in transit		7,800
		28,492
Less: Outstanding checks		9,752
Adjusted cash balance per bank		$18,740
Cash balance as per books, August 31, 2017		$19,130
Add: Interest earned on checking account		45
		19,175
Less: Service charge	50
Safety deposit box fee	25
Error amount in disbursements	360	435
Adjusted cash balance per books		$18,740

Table (3)

Note: Refer to requirements (a) and (b) for amounts of deposits in transit, outstanding checks, and error amount.

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 cash balance per bank to remove the differences.
• Interest earned on checking account is credited by bank to the bank account of which the company is not aware of. So, while preparing bank reconciliation statement, company should add the amount to the cash balance per books.
• Banks deduct the service charge for the services rendered. But the company is not aware of such deductions. So, company deducts the cash balance per books while bank reconciliation preparation.
• Banks 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.
• The accountant has recorded the amount of payable of $400 as $40. So, the cash balance increased by $360. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account balance.

(d)

To determine

To prepare: Adjusting journal entries for Incorporation P

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 interest revenue.

Date		Account Titles and Description	Post. Ref.	Debit ($)	Credit ($)
2017
August	31	Cash		45
		Interest Revenue			45
		(To record interest received)

Table (4)

Description:

• Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
• Interest Revenue is a revenue account. The amount has increased because interest is earned. Revenues increase Equity account, and an increase in Equity is credited.

Prepare journal entry to record bank service charges.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
August	31	Bank Charge Expense		50
		Cash			50
		(To record bank service charges)

Table (5)

Description:

• Bank Charges 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 safety deposit box rent.

Date		Account Titles and Description	Post Ref.	Debit ($)	Credit ($)
2017
August	31	Bank Charge Expense		25
		Cash			25
		(To record safety deposit box rent)

Table (6)

Description:

• Bank Charges 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 book error in recording payable.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
August	31	Accounts Payable		360
		Cash			360
		(To record amount under-payable by accountant)

Table (7)

Description:

• 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.
• Cash is an asset account. The amount is decreased to pay the under-paid check, and a decrease in asset is credited.