Chapter 8, Problem 4AP

1.

To determine

Prepare the bank reconciliation for Company B as at July 31, 2015.

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 for Company B as at July 31, 2015.

Company B
Bank Reconciliation
July 31, 2015
Balance per bank statement		$27,233	Balance per books		$27,497
Add: Deposits in transit		11,514	Add: Note collected by bank		7,955
		$38,747			$35,452
Less:			Less:		16
Outstanding checks:			NSF Check	$805
Check Number: 3031	$1,482		Service charge	25
Check Number: 3065	382		Error in Check Number: 3056	20	850
Check Number: 3069	2,281	4,145
Adjusted bank balance		$34,602	Adjusted book balance		$34,602

Table (1)

Working Notes:

Calculate book error in recording Check Number: 3056.

$\begin{array}{c}\text{Book error add }\left(\text{deduct}\right)\text{ = Amount recorded}–\text{Actual amount}\\ \text{= \$1,250 – \$1,270}\\ \text{= \$}\left(\text{20}\right)\end{array}$

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.
• 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 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.
• 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.
• 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 check for rent expense of $1,270 as $1,250. So, the cash balance increased by $20. Therefore, the balance should be deducted from books, to decrease amount of the cash ledger account balance.

2.

To determine

Prepare adjusting journal entries that arise due to bank reconciliation for Company B as on July 31, 2015.

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 note receivable collected by bank.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
2015
July	31	Cash			7,955
		Collection Expense			45
			Note Receivable			8,000
		(Record note 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.
• Collection Expense is an expense account. Expenses decrease Equity account and decrease in Equity is debited.
• Note 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 NSF check.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2015
July	31	Accounts Receivable			805
			Cash			805
		(Record NSF as increase in accounts receivable)

Table (3)

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.

Prepare journal entry to record bank service charge.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2015
July	31	Miscellaneous Expense			25
			Cash			25
		(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 book error amount for Check Number: 3056.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2015
July	31	Rent Expense			20
			Cash			20
		(Record incorrectly recorded book error amount)

Table (5)

Description:

• Rent Expense is an expense account. The expense amount was erroneously recorded, and so cash balance increased. Hence, expense is increased by debiting.
• Cash is an asset account. The amount is decreased because cash is paid and a decrease in asset is credited.

3.

a.

(i).

To determine

Explain the effect of company’s unadjusted cash balance of $27,497 being recorded on bank reconciliation as $27,947, on adjusted bank statement cash balance.

Explanation of Solution

If the unadjusted cash balance of $27,497 is recorded on bank reconciliation as $27,947, the final adjusted bank balance will not be affected.

(ii).

To determine

Explain the effect of company’s unadjusted cash balance of $27,497 being recorded on bank reconciliation as $27,947, on adjusted Cash account balance.

Explanation of Solution

If the unadjusted cash balance of $27,497 is recorded on bank reconciliation as $27,947, the final adjusted Cash account balance will be overstated by $450$\left(\$27,947-\$27,497\right)$.

b.

(i).

To determine

Explain the effect of addition of note of $7,955 collected by bank to bank statement balance, on adjusted bank statement cash balance.

Explanation of Solution

If the note collected by bank is added to the bank statement balance, the final adjusted bank balance will be overstated by $7,955.

(ii).

To determine

Explain the effect of addition of note of $7,955 collected by bank to bank statement balance, on adjusted Cash account balance.

Explanation of Solution

If the note collected by bank is added to the bank statement balance, the final adjusted cash balance will be understated by $7,955.