Chapter 7, Problem 7.9E

(a)

To determine

To prepare: Bank reconciliation of Company H, as at September 30, 2017

Answer to Problem 7.9E

The adjusted cash balance per bank, and the adjusted cash balance per books of Company L is $18,855.

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 H, as at September 30, 2017.

Company H
Bank Reconciliation
September 30, 2017
Cash balance as per bank statement, September 30, 2017		$16,500
Add: Deposits in transit		4,738
		21,238
Less: Outstanding checks		2,383
Adjusted cash balance per bank		$18,855
Cash balance as per books, September 30, 2017		$17,600
Add: Note receivable collected by bank	$1,830
Interest earned on checking account	45	1,875
		19,475
Less: NSF check	560
Safety deposit box rent	60	620
Adjusted cash balance per books		$18,855

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.
• 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.
• 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.
• While bank reconciliation, 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

To prepare: Adjusting journal entries for Company H

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 note receivable collected by bank.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
2017
September	30	Cash		1,830
		Note Receivable			1,830
		(To record receivable collected by bank)

Table (2)

Explanation:

• 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 interest revenue.

Date		Account Titles and Explanation	Ref.	Debit ($)	Credit ($)
2017
September	30	Cash		45
		Interest Revenue			45
		(To record interest received)

Table (3)

Explanation:

• Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
• Interest Revenue is a revenue account. The amount has increased because interest is earned. Revenues increase Equity account, and an increase in Equity is credited.

Prepare journal entry to record NSF check.

Date		Accounts and Explanation	Post Ref.	Debit ($)	Credit ($)
2017
September	30	Accounts Receivable (A+)		560
		Cash (A–)			560
		(To record NSF check)

Table (4)

Explanation:

• 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	Ref.	Debit ($)	Credit ($)
2017
September	30	Bank Charge Expense		60
		Cash			60
		(To record safety deposit box rent)

Table (5)

Explanation:

• Bank Charges 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.