Chapter 8, Problem 5PA

a)

To determine

Prepare Bank reconciliation of Company BF as at July 30, 2016.

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 Company BF as at July 30, 2016.

Company BF
Bank Reconciliation
June 30, 2016
Particulars	Amount ($)	Amount ($)
Cash balance as per bank statement		13,624
Add:
Deposit of June30, not recorded by bank		$1,117.74
Less: Outstanding checks
No : 738	251.40
No : 756	113.95
No : 758	259.60
No : 759	901.50	1,526.45
Adjusted cash balance per bank		13,216.00
Cash balance as per books		10,145.50
Add:
Notes and interest receivable collected by bank	3,710.00
Error in recording check no. 743	90.00	3,800.00
Less:
Checks returned because of insufficient funds	550.00
Error in recording June 10 deposit	100.00
Error in recording June 24 deposit	4.50
Bank service charges	75.0	729.50
Adjusted cash balance per books		13,216.00

Table (1)

• 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.

Working Note:

Determine the balance per company’s book, June 30

$\begin{array}{c}\text{Balance per Bank account, June 30 = }\left(\begin{array}{l}\text{C}\text{}\text{ash balance, May 1 }\\ \text{+ June receipts }\\ \text{– June disbursments}\end{array}\right)\\ =\$9,317.40+\$9,223.76-\$8,395.66\\ =\$10,145.50\end{array}$

b)

To determine

Prepare adjusting journal entries for Company BF.

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 account receivable collected by bank.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
2016
June	30	Cash		3,800
		Notes Receivable			3,500
		Interest Revenue			210
		Accounts payable			90
		(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.

Prepare journal entry to record book error amount.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2016
June	30	Sales		104.50
		Accounts receivables		550.00
		Miscellaneous expenses		75.00
		Cash			729.50
		(To record amount under-payable by accountant)

Table (3)

• Sales is a revenue and increases the stockholders’ equity. Hence, debit sales account.
• 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.

c)

To determine

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

Explanation of Solution

The adjusted balance from the bank reconciliation should be reported as cash on the June 30 balance sheet for BF is $13,216.00.

(d)

To determine

Explain the error to be included in the bank reconciliation.

Explanation of Solution

Error amount of $540 ($930 – $390) 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.