Chapter 7, Problem 5BP

a.

To determine

Prepare bank reconciliation of Company S as at April 30, 2012.

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 S as at April 30, 2012.

Company S
Bank Reconciliation
April 30, 2012
Ending balance from bank statement		$14,556	Balance from general ledger		$13,870
ADD:			ADD:
Deposit in transit		1,425	Interest revenue		60
		$15,981			$13,930
LESS:			LESS:
Outstanding checks:			Error in recording check number-811	$54
Check number: 797	$450		NSF Check	500
Check number: 812	948		Service charge	40	594
Check number: 815	372
Check number: 816	875	2,645
Reconciled cash balance		$13,336	Reconciled cash balance		$13,336

Table (1)

Working Notes:

Calculate book error amount.

$\begin{array}{c}\text{Book error add }\left(\text{deduct}\right)\text{ = Amount recorded}–\text{Actual amount}\\ \text{= \$272 – \$326}\\ \text{= \$}\left(\text{54}\right)\end{array}$

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.
• 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.
• The accountant has recorded the check numbered: 811 for delivery expense of $326 as $272. So, the cash balance increased by $54. Therefore, the balance should be deducted from books, to increase amount of the cash ledger account balance.
• 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.

b.

To determine

Prepare adjusting journal entries that arise due to bank reconciliation.

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 income.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2012
April	30	Cash			60
			Interest Income			60
		(Record interest income credited by bank)

Table (2)

Description:

• Cash is an asset account. The amount is increased because cash is received for the over-paid check, and an increase in asset is debited.
• Interest Income is a revenue account. Revenues and gains increase Equity account and an increase in Equity is credited.

Prepare journal entry to record book error amount.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2012
April	30	Delivery Expense			54
			Cash			54
		(Record incorrectly recorded book error amount)

Table (3)

Description:

• Delivery 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 increased because bank collected note receivable, and an increase in assets should be debited.

Prepare journal entry to record NSF check.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
2012
April	30	Accounts Receivable			500
			Cash			500
		(Record NSF as increase in accounts receivable)

Table (4)

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 ($)	Credit ($)
2012
April	30	Miscellaneous Expense			40
			Cash			40
		(Record payment of bank service charges)

Table (5)

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.