Concept explainers
a.
Prepare
a.
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 the bank reconciliation of Corporation C as at December 31, Year 1.
Corporation C | ||
Bank Reconciliation | ||
December 31, Year 1 | ||
Balance as per bank statement, December 31, Year 1 | $104,100 | |
Add: Deposits in transit | 16,800 | |
120,900 | ||
Less: Outstanding checks | (12,400) | |
Adjusted cash balance | $108,500 | |
Balance per depositor’s records, December 31, Year 1 | $112,000 | |
Less: | ||
Bank service charge | (100) | |
NSF check | (2,500) | |
Error in recording Check Number: 550 | (900) | (3,500) |
Adjusted cash balance | $108,500 |
Table (1)
Working Notes:
Calculate book error amount.
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.
- 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.
- 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. - The bookkeeper has recorded the check numbered: 550 for computer equipment of $3,200 as $2,300. So, the cash balance increased by $900. Therefore, the balance should be deducted from books, to decrease amount of the cash ledger account balance.
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare adjusting journal entries that arise due to bank reconciliation for Corporation H, as on December 31, Year 1.
Date | Account Titles and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Year 1 | ||||||
December | 31 | Bank Service Charges | 100 | |||
Accounts Receivable | 2,500 | |||||
Computer Equipment | 900 | |||||
Cash | 3,500 | |||||
(Record payment of bank service charges, NSF check, and increase computer equipment) |
Table (2)
Description:
- Bank Service Charges is an expense account and the amount is increased because bank has charged service charges. Expenses decrease Equity account and decrease in Equity is debited.
- Accounts Receivable is an asset account. The bank has not collected the amount from the customer due to insufficient funds, which was earlier recorded as a receipt. As the collection could not be made, amount to be received increased. Therefore, increase in asset would be debited.
- Computer Equipment is an asset account. The asset amount was erroneously recorded, and asset is increased by debiting.
- Cash is an asset account. The amount is decreased because bank service charge is paid, bank could not collect amount due to insufficient funds in customer’s account, and a decrease in asset and asset is decreased.
b.
Compute the amount of cash and cash equivalents to be reported by Corporation C on its
b.
Explanation of Solution
Cash and cash equivalents: Cash is the money readily available in the form of currency. Cash equivalents are the near-cash items, which are readily convertible into cash. Cash equivalents have a maturity period of three months, or less than 3 months. Cash equivalents are reported along with cash in the assets section of the balance sheet, as ‘Cash and cash equivalents’.
Compute the amount of cash and cash equivalents to be recorded by Corporation C on its balance sheet as at December 31, Year 1.
Details | Amount ($) |
Adjusted cash balance | $108,500 |
150,000 | |
Hugh grade commercial paper | 5,000 |
Cash and cash equivalents | $263,500 |
Table (3)
Note: Refer to Part (a) for value and computation of adjusted cash balance.
c.
Prepare the
c.
Explanation of Solution
Journalize the adjustment entry of accrued interest revenue on December 31, Year 1.
Date | Accounts and Explanation | Post Ref. | Debit ($) | Credit ($) | ||
Year 1 | ||||||
December | 31 | Interest Receivable | 135 | |||
Interest Revenue | 135 | |||||
(Record accrued interest on note) |
Table (4)
Description:
- Interest Receivable is an asset account. Since interest to be received has increased, asset value increased, and an increase in asset is debited.
- Interest Revenue is a revenue account. Since revenues increase equity, equity value is increased, and an increase in equity is credited.
Working Notes:
Compute amount of interest accrued on December 31, Year 1.
d.
Compute the amount of net realizable value to be reported by Corporation C on its balance sheet as at December 31, Year 1.
d.
Explanation of Solution
Net realizable value: The value of accounts receivables that could be recognized by the company is referred to as net realizable value. In simple words, net realizable value is accounts receivables, less allowance of uncollectible amount.
Compute the year-end net realizable value of accounts receivable of Corporation C.
Details | Amount ($) | Amount ($) |
Accounts receivable, December 31, Year 1: | ||
Accounts receivable, January 1, Year 1 | $540,000 | |
Add: Credit sales | 6,480,000 | |
Less: Accounts receivable written off | (14,000) | |
Add: Reinstated accounts receivable | 2,500 | |
Less: Accounts receivable collected | (5,252,500) | |
Accounts receivable, December 31, Year 1 | $1,756,000 | |
Less: Allowance for Doubtful Accounts, December 31, Year 1: | ||
Allowance for Doubtful Accounts, January 1, Year 1 | $12,000 | |
Add: Uncollectible accounts expense | 64,800 | |
Less: Accounts receivable written off | (14,000) | |
Allowance for Doubtful Accounts, December 31, Year 1 | 62,800 | |
Net realizable value of accounts receivable | $1,693,200 |
Table (5)
Working Notes:
Compute uncollectible accounts expense.
e.
Compute the amount of financial assets to be reported by Corporation C on its balance sheet as at December 31, Year 1.
e.
Explanation of Solution
Financial assets: The assets that are easily convertible into cash are referred to as financial assets. These are called as financial assets because these are money represented in the form of assets, and the financial resources or money flows through these assets. Cash, short-term and long-term marketable securities, accounts receivables, and notes receivables are the financial assets of a company.
Compute the amount of financial assets to be reported by Corporation C on its balance sheet as at December 31, Year 1.
Details | Amount ($) |
Cash and cash equivalents | $263,500 |
Marketable securities | 245,000 |
Notes receivable | 18,000 |
Interest receivable | 135 |
Accounts receivable | 1,693,200 |
Total financial assets, December 31, Year 1 | $2,219,835 |
Table (6)
Note: Refer to Part (b) for value and computation of cash and cash equivalents balance, Part (c) for interest receivable, and Part (d) for net realizable value of accounts receivable.
f.
Evaluate the number of days Corporation C takes to collect the receivables and indicate whether the performance of the corporation is above or below average, if the normal industry standard is an average of 60 days.
f.
Explanation of Solution
Number of days’ sales in receivables: This ratio measures the period of the time receivables are collected in the period. This ratio analyzes the period receivables are outstanding. So, this ratio also gauges the efficacy of collecting receivables. Lower the ratio, more efficient the collection of receivables.
Formula for number of days’ sales in receivables:
Accounts receivable turnover: This is the ratio which analyzes the number of times accounts receivables is collected and converted into cash during the period. This ratio gauges the efficacy of collecting receivables. Larger the ratio, more efficient in collecting receivables.
Formula for accounts receivable turnover:
Compute the number of days Corporation C takes to collect the receivables.
Step 1: Compute the net realizable value of accounts receivables as on January 1, Year1.
Details | Amount ($) |
Accounts receivable, January 1, Year 1 | $540,000 |
Allowance for Doubtful Accounts balance | 12,000 |
Net realizable value of accounts receivables, January 1 | $528,000 |
Table (7)
Step 2: Compute accounts receivables turnover rate of Corporation C.
Note: Refer to Table (7) for value and computation of beginning balance of net realizable value of accounts receivables, and Part (d) for net realizable value of accounts receivable.
Step 3: Compute number of days Corporation C takes to collect receivables.
Note: Refer to Step 2 for value and computation of accounts receivable turnover rate.
Analysis: Comparing with the normal industry standard as an average of 60 days, the average collection period of Corporation C of 62.61 days is slightly lower than the standard.
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