Chapter 8, Problem 4PB

To determine

(1)

Prepare bank reconciliation of Company CS as at November 30.

Answer to Problem 4PB

The adjusted cash balance per bank, and the adjusted cash balance per books of Company CS is $78,535.

Prepare bank reconciliation of Company CS as at November 30.

Company CS
Bank Reconciliation
November 30
Particulars	Amount ($)	Amount ($)
Cash balance as per bank statement		112,675
Add:
Deposit of May 31, not recorded by bank		12,200
Less:
Outstanding checks	41,840
Bank error in charging check as $2,750 instead of $7,250	4,500	46,340
Adjusted cash balance per bank		78,535
Cash balance as per books		66,935
Add:
Notes and interest receivable collected by bank	7,385
Error in recording check as $7,600 instead of $760	6,840	14,225
Less:
Checks returned because of insufficient funds	2,500
Banks service charges	125	2,625
Adjusted cash balance per books		78,535

Table (1)

Working Notes: Determine the balance per company’s book, November, 1.

$\begin{array}{c}\text{Balance per company's books, November 1 = }\left(\begin{array}{l}\text{C}\text{}\text{ash balance, November 1 }\\ \text{+ Cash deposits in November }\\ \text{– Checks written in November}\end{array}\right)\\ =\$81,145+\$293,150–\$307,360\\ =\$66,935\end{array}$

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.

Reasons:

• ■ 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 adjusting journal entries for Company CS

Explanation of Solution

Prepare journal entry to record account receivable collected by bank.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
November	30	Cash		14,225
		Notes Receivable			7,000
		Interest Revenue			385
		Accounts payable, R Co.			6,840
		(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.
• ■ Accounts payable is a liability and increases the liability account. So, it is credited. 

Prepare journal entry to record book error amount.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
November	30	Accounts Payable  - H A.		2,500
		Miscellaneous expenses		125
		Cash			2,625
		(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.
• ■ 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

Report amount of cash in the balance sheet on November 30.

Explanation of Solution

Thus, the adjusted balance from the bank reconciliation should be reported as cash on the November 30 balance sheet for CS is $78,535.