Chapter 7, Problem 7.4APR

(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 BB as at May 31, 2016.

Answer to Problem 7.4APR

The adjusted cash balance per bank, and the adjusted cash balance per books of Company BB is $39,475.

Prepare bank reconciliation of Company BB as at May 31, 2016.

Company BB
Bank Reconciliation
May 31, 2016
Particulars	Amount ($)	Amount ($)
Cash balance as per bank statement		43,525
Add:
Deposit of May 31, not recorded by bank	1,850
Bank error in charging check as $930 instead of $390	540	2,390
Less:
Outstanding checks		6,440
Adjusted cash balance per bank		39,475
Cash balance as per books		35,670
Add:
Notes and interest receivable collected by bank		5,250
Less:
Error in recording check	90
Bank service charges	30	1,445
Adjusted cash balance per books		39,475

Table (1)

Working Notes:

Calculate the bank error

$\begin{array}{c}\text{Bank error amout = Actual amount–Amount recorded}\\ \text{= \$390 – \$930}\\ \text{= \$540}\end{array}$

Calculate the error in recording check.

$\begin{array}{c}\text{Error amout = Actual amount–Amount recorded}\\ \text{= \$210 – \$120}\\ \text{= \$90}\end{array}$

Determine the balance per company’s book, May 31, 2016.

$\begin{array}{c}\text{Balance per company's books, May 31 = }\left(\begin{array}{l}\text{C}\text{}\text{ash balance, May 1 }\\ \text{+ Cash deposits in May }\\ \text{– Checks written in May}\end{array}\right)\\ =\$34,250+\$14,330-\$138,880\\ =\$35,670\end{array}$

Explanation of Solution

• 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.
• Notes 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.
• Error in recording checks and banks deducting 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 BB

Explanation of Solution

Prepare journal entry to record account receivable collected by bank.

Date		Account Titles and Description	Ref.	Debit ($)	Credit ($)
2016
May	31	Cash		5,250
		Notes Receivable			5,000
		Interest Revenue			250
		(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.
• Notes 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.
• Interest revenue is a revenue account and increases the stockholders’ equity. Thus, increases in the stockholders’ equity should be credited.

Prepare journal entry to record book error amount.

Date		Accounts and Description	Post Ref.	Debit ($)	Credit ($)
2016
May	31	Accounts Payable  - A Co.		90
		Accounts receivables – J Co.		1,325
		Miscellaneous expenses		30
		Cash			1,445
		(To record amount under-payable by accountant)

Table (3)

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.
• Accounts receivable is an asset account. It is increased and thus, current asset is increased and debited.
• Miscellaneous expenses are expenses account and decrease the stockholders’ equity. Thus, decrease in the stockholders’ equity should be debited.
• Cash is an asset account. The amount is decreased to pay the under-paid check, and a decrease in asset is credited.

(c)

To determine

To report:  Amount of cash in the balance sheet on May 31, 2016.

Explanation of Solution

Thus, the adjusted balance from the bank reconciliation should be reported as cash on the May 31, 2016 balance sheet for BB Co. is $39,475.