Chapter 7, Problem 7.5AP

(a)

To determine

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.

To prepare: Bank reconciliation of Company T as at May 31, 2017

Answer to Problem 7.5AP

The adjusted cash balance per bank, and the adjusted cash balance per books of Company T is $8,931.90.

Explanation of Solution

Prepare bank reconciliation of Company T as at May 31, 2017.

Company T
Bank Reconciliation
July 31, 2017
Cash balance as per bank statement, May 31, 2017		$6,968.00
Add: Deposits in transit	$1,880.15
Error in wrongly debiting Company T check	360.00	2,240.15
		9,208.15
Less: Outstanding checks		276.25
Adjusted cash balance per bank		$8,931.90
Cash balance as per books, May 31, 2017		$6,738.90
Add: Note receivable collected by bank		2,690.00
		9,428.90
Less: Check printing charges	$40.00
Error in May 12 deposit	50.00
Error in recording check number: 1181	27.00
NSF check	380.00	497.00
Adjusted cash balance per books		$8,931.90

Table (1)

Working Notes:

Calculate book error deposit amount.

$\begin{array}{c}\text{Book error amout = Amount recorded–Actual amount}\\ \text{= \$933}\text{.15 – \$883}\text{.15}\\ \text{= \$50}\text{.00}\end{array}$

Calculate book error in check number: 1181 amount.

$\begin{array}{c}\text{Book error amout = Actual amount–Amount recorded}\\ \text{= \$685 – \$658}\\ \text{= \$27}\end{array}$

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.
• The incorrectly charged check to the company’s account would decrease the cash balance per bank. So, company adds the check to balance per bank while bank reconciliation preparation.
• 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.
• The accountant has recorded the amount of cash sales of $883.15 as $933.15. So, the cash balance increased by $50. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account balance.
• The accountant has recorded the amount of payable of $685 as $658 for the check numbered 1181. So, the cash balance increased by $27. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account balance.
• 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

To prepare: Adjusting journal entries for Company T

Explanation of Solution

Prepare journal entry to record note receivable collected by bank.

Date		Account Titles and Description	Ref.	Debit ($)	Credit ($)
2017
May	31	Cash		2,690
		Note Receivable			2,690
		(To record 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.
• 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 printing charge.

Date		Account Titles and Description	Ref.	Debit ($)	Credit ($)
2017
May	31	Bank Charge Expense		40
		Cash			40
		(To record printing charge)

Table (3)

Description:

• Bank Charges Expense is an expense account and the amount is increased because bank has charged service charges for printing. 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 in recording cash sales.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
May	31	Sales Revenue		50
		Cash			50
		(To record decrease in over-deposited amount)

Table (4)

Description:

• Sales Revenue is a revenue account. Sales revenue is debited to decrease the previously over-deposited cash sale amount.
• Cash is an asset account. The amount is decreased to decrease the over-deposited cash, and a decrease in asset is credited.

Prepare journal entry to record book error in recording payable.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
May	31	Accounts Payable		27
		Cash			27
		(To record amount under-payable by accountant)

Table (5)

Description:

• 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.
• Cash is an asset account. The amount is decreased to pay the under-paid check, and a decrease in asset is credited.

Prepare journal entry to record NSF check.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2017
May	31	Accounts Receivable		380
		Cash			380
		(To record NSF check)

Table (6)

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.