Chapter 7, Problem 7.3AP

(a)

To determine

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.

To prepare: Bank reconciliation of Company K as at July 31, 2017

Answer to Problem 7.3AP

The adjusted cash balance per bank, and the adjusted cash balance per books of Company K is $7,024.00.

Explanation of Solution

Prepare bank reconciliation of Company K as at July 31, 2017.

Company K
Bank Reconciliation
July 31, 2017
Cash balance as per bank statement, July 31, 2017		$7,690.80
Add: Deposit in transit		1,193.30
		8,884.10
Less: Outstanding checks		1,860.10
Adjusted cash balance per bank		$7,024.00
Cash balance as per books, July 31, 2017		$6,140.00
Add: Accounts receivable collected by bank		1,520.00
		7,660.00
Less: Bank service charge	25.00
Error in recording check number: 2480	36.00
NSF check	575.00	636.00
Adjusted cash balance per books		$7,024.00

Table (1)

Working Notes:

Calculate book error in check number: 2480 amount.

$\begin{array}{c}\text{Book error amout = Actual amount–Amount recorded}\\ \text{= \$384 – \$348}\\ \text{= \$36}\end{array}$

• 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.
• Account 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.
• 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.
• The accountant has recorded the amount of $384 as $348 for the check numbered 2480. So, the cash balance increased by $36. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account 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 books, to increase the Accounts Receivable account.

(b)

To determine

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.

To prepare: Adjusting journal entries for Company K

Explanation of Solution

Prepare journal entry to record account receivable collected by bank.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
2017
July	31	Cash		1,520
		Account Receivable			1,520
		(To record receivable collected by bank)

Table (2)

Description

• Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
• Account 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.

Prepare journal entry to record bank service charge.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
2017
July	31	Bank Charge Expense		25
		Cash			25
		(To record bank service charge)

Table (3)

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 amount.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
July	31	Accounts Payable		36
		Cash			36
		(To record amount under-payable by accountant)

Table (4)

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.

Prepare journal entry to record NSF check.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
July	31	Accounts Receivable		575
		Cash			575
		(To record NSF check)

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.