Chapter 7, Problem 7.13P

(1)

To determine

Bank reconciliation:

Bank reconciliation is prepared by an accountant. In order to check the differences between the cash book balance and bank balance as per bank statement, the bank reconciliation statement is prepared. It plays a major role in the internal control of cash and it ensures the management about the completeness of the cash book.

To prepare: A bank reconciliation of MS Incorporation as at December 31, 2016:

Answer to Problem 7.13P

Compute the balance as per books:

Balance as per Bank	$14,632.12
Add: Deposit Outstanding	575.00
Automatic Mortgage Payment	450.00
Bank Service Charges	14.00
NSF Check Charges	85.00
Less: Checks outstanding	(1,320.25)
Error in Recording Rent Check	(18.00)
Deposit Credit to Company’s Account in Error	(875,00)
Balance as per Books	$13,542.87

Table (1)

Prepare bank reconciliation of MS Incorporation Company as at December 31, 2016:

MS Incorporation
Bank Reconciliation
December 31, 2016
Bank Balance		Books Balance
Balance as per Bank Statement	$14,362.12	Balance as per Books	$13,542.87
Add:		Add:
Deposit in Outstanding	575.00	Error in recording rent check	18.00
Less:		Less:
Outstanding checks	(1,320.25)	Service charge	(14.00)
Deposit Credit to Company’s Account in Error	(875.00)	NSF Checks	(85.00)
		Automatic mortgage note payment	(450.00)
Corrected Bank Balance	$13,011.87	Corrected Book Balance	$13,011.87

Table (2)

Explanation of Solution

The various items on the reconciliation for bank statement are explained below:

• Deposits Outstanding: The deposit of $575 was outstanding; therefore, add the deposit in transit to the balance from bank statement.
• Outstanding checks: Company has recorded the payments immediately after the checks are issued but the bank has not deducted the amounts. Therefore, deduct the outstanding checks from the balance from bank statement.
• Deposit Credit to Company’s Account in Error: The deposit of $875 does not belong to MS Incorporation but included in the bank balance. Therefore, it is deducted.

The various items on the reconciliation for books are explained below:

• Bank service charge: The service of $14 that was charged by the bank is debited to the bank account, but the company could not record the service charge; therefore, deduct the service charged from the cash ledger account balance.
• Book error in recording cash: Cash payment for payment of rent of $246 was recorded as $264. Hence, the balance amount of $\text{\$18}\left(\$264-\$246\right)$ is added to the cash balance.

(2)

To determine

To prepare: Adjusting journal Entries.

Explanation of Solution

Cash disbursement for rent:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Cash		18
	Rent Expenses			18
	(To record the adjustment of cash disbursement for rent)

Table (3)

• Cash is an asset and increased, hence debit cash for $18.
• Rent Expenses is an expense account and it increases the stock holder’s equity. Hence credit rent Expenses for $18.

Credits to cash revealed by the bank reconciliation:

Date	Account Title and Explanation	Post Ref.	Debit ($)	Credit ($)
	Interest Expense		350
	Mortgage Note Payable		100
	Miscellaneous Expense (Bank Service Charges)		14
	Accounts Receivable (NSF Checks)		85
	Cash			579
	(To record the Credits to cash revealed by the bank reconciliation)

Table (4)

The total amount of amortization prior to notes payable is $450 which includes the interest of $340. Therefore, the principal amount of amortization of notes payable is $\$100\left[\$450-\$350\right]$.

• Interest Expense is an expense account and it decreases the stock holder’s equity. Hence debit rent Expenses for $350.
• Mortgage Note Payable is a liability and decreased hence debit mortgage note payable for $100.
• Miscellaneous Expense is an expense account and it decreases the stock holder’s equity. Hence debit Miscellaneous Expenses for $14.
• Accounts Receivable is an asset and increased hence debit accounts receivable for $85.
• Cash is an asset and decreased, hence credit cash for $579.

(3)

To determine

The Cash and Cash Equivalents to be reported in the Balance Sheet at December 31, 2016.

Explanation of Solution

The Cash and Cash Equivalents to be reported in the Balance Sheet at December 31, 2016 is determined as follows:

MS Incorporation
Balance Sheet
As on December 31st  2016
Details	Amount ($)	Amount ($)
Assets:
Current assets:
Cash and Cash Equivalents:
Checking account balance	$13,011.87
Petty Cash	200.00
U.S Treasury Bills	5,000.00
Total Cash and Cash Equivalents		$18,211.87

Table (5)

Conclusion

The Cash and Cash Equivalents to be reported in the Balance Sheet at December 31, 2016 is $18,211.87.