Chapter 7, Problem 9AP

a.

To determine

Prepare bank reconciliation of Company SB, as at September 30.

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 SB as at September 30.

Company SB
Bank Reconciliation
September 30
Ending balance from bank statement		$13,375	Balance from general ledger		$9,778
ADD:			ADD:
Deposit in transit		9,700	Error in recording check number-276	162
			Note collection	2,620	2,782
		$23,075			$12,560
LESS:			LESS:
Outstanding checks		11,600	NSF Check	990
			Service charge	95	$1,085
Reconciled cash balance		$11,475	Reconciled cash balance		$11,475

Table (1)

Working Notes:

Calculate book error amount in recording Check Number: 276.

$\begin{array}{c}\text{Book error add }\left(\text{deduct}\right)\text{ = Amount recorded}–\text{Actual amount}\\ \text{= \$980 – \$818}\\ \text{= \$162}\end{array}$

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.
• The accountant has recorded the check numbered: 276 for a payable of $818 as $980. So, the cash balance decreased by $162. Therefore, the balance should be added to books, to increase amount of the cash ledger account balance.
• 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.
• 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 book error in recording payable.

Date		Accounts and Explanation		Post Ref.	Debit ($)	Credit ($)
September	30	Cash			162
			Accounts Payable			162
		(Record over-paid amount by accountant)

Table (2)

Description:

• Cash is an asset account. The amount is increased to receive the over-paid check, and an increase in asset is debited.
• Accounts Payable is a liability account. The over-paid payable is received, and so the account is credited to reverse the effect.

Prepare journal entry to record note receivable collected by bank.

Date		Account Titles and Explanation		Ref.	Debit ($)	Credit ($)
September	30	Cash			2,620
			Note Receivable			2,620
		(Record note receivable collected by bank)

Table (3)

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 NSF check.

Date		Account Titles and Explanation		Post Ref.	Debit ($)	Credit ($)
September	30	Accounts Receivable			990
			Cash			990
		(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 ($)	Credit ($)
September	30	Miscellaneous Expense			95
			Cash			95
		(Record payment of check printing charge)

Table (5)

Description:

• Miscellaneous Expense is an expense account. 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.