Concept explainers
(a)
The amount of deposits-in-transit for Incorporation P as at August 31, 2017
(a)
Answer to Problem 7.11E
Explanation of Solution
Deposits-in-transit: The checks that are deposited and recorded by the depositor, but not yet recorded by the bank are referred to as deposits-in-transit.
Compute the deposits in transit for Incorporation P as at August 31, 2017.
Particulars | Amount ($) | Amount ($) |
Receipts as per company in August | $74,000 | |
Deposits as per bank statement, August | $71,000 | |
Less: Deposits in transit as per July 31 reconciliation | 4,800 | 66,200 |
Amount of deposits in transit as at August 31, 2017 | $7,800 |
Table (1)
(b)
The amount of checks outstanding for Incorporation P as at August 31, 2017.
(b)
Answer to Problem 7.11E
Explanation of Solution
Outstanding checks: Outstanding checks are the checks that are issued by the company, but not yet paid by the bank.
Compute outstanding checks for Incorporation P as at August 31, 2017.
Particulars | Amount ($) | Amount ($) |
Disbursements recorded by company in August | $73,570 | |
Add: Error amount | 360 | |
Corrected total disbursements | 73,930 | |
Checks cleared by bank in August | $68,678 | |
Less: Outstanding checks as per July 31 reconciliation | 4,500 | |
Total checks cleared by bank in August | 64,178 | |
Outstanding checks as at August 31, 2017 | $9,752 |
Table (2)
Working Notes:
Calculate book error amount.
(c)
To prepare: Bank reconciliation of Incorporation P as at August 31, 2017.
(c)
Answer to Problem 7.11E
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 Incorporation P as at August 31, 2017.
Incorporation P | ||
Bank Reconciliation | ||
August 31, 2017 | ||
Cash balance as per bank statement, August 31, 2017 | $20,692 | |
Add: Deposits in transit | 7,800 | |
28,492 | ||
Less: Outstanding checks | 9,752 | |
Adjusted cash balance per bank | $18,740 | |
Cash balance as per books, August 31, 2017 | $19,130 | |
Add: Interest earned on checking account | 45 | |
19,175 | ||
Less: Service charge | 50 | |
Safety deposit box fee | 25 | |
Error amount in disbursements | 360 | 435 |
Adjusted cash balance per books | $18,740 |
Table (3)
Note: Refer to requirements (a) and (b) for amounts of deposits in transit, outstanding checks, and 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.
- 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.
- Banks deduct the service charge for the services rendered. But the company is not aware of such deductions. So, company deducts the cash balance per books while bank reconciliation preparation.
- Banks 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.
- The accountant has recorded the amount of payable of $400 as $40. So, the cash balance increased by $360. Therefore, the balance should be deducted from books, to reduce amount from the cash ledger account balance.
(d)
To prepare:
(d)
Explanation of Solution
Debit and credit rules:
- Debit an increase in asset account, increase in expense account, decrease in liability account, and decrease in
stockholders’ equity accounts. - Credit decrease in asset account, increase in revenue account, increase in liability account, and increase in stockholders’ equity accounts.
Prepare journal entry to record interest revenue.
Date | Account Titles and Description |
Post. Ref. | Debit ($) | Credit ($) | |
2017 | |||||
August | 31 | Cash | 45 | ||
Interest Revenue | 45 | ||||
(To record interest received) |
Table (4)
Description:
- Cash is an asset account. The amount is increased because bank collected note receivable, and an increase in assets should be debited.
- Interest Revenue is a revenue account. The amount has increased because interest is earned. Revenues increase Equity account, and an increase in Equity is credited.
Prepare journal entry to record bank service charges.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
August | 31 | Bank Charge Expense | 50 | ||
Cash | 50 | ||||
(To record bank service charges) |
Table (5)
Description:
- Bank Charges Expense is an expense account and the amount is increased because bank has charged service charges. Expenses decrease Equity account and decrease in Equity is debited.
- Cash is an asset account. The amount is decreased because bank service charge is paid, and a decrease in asset is credited.
Prepare journal entry to record safety deposit box rent.
Date | Account Titles and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
August | 31 | Bank Charge Expense | 25 | ||
Cash | 25 | ||||
(To record safety deposit box rent) |
Table (6)
Description:
- Bank Charges Expense is an expense account and the amount is increased because bank has charged service charges. Expenses decrease Equity account and decrease in Equity is debited.
- Cash is an asset account. The amount is decreased because bank service charge is paid, and a decrease in asset is credited.
Prepare journal entry to record book error in recording payable.
Date | Accounts and Description | Post Ref. | Debit ($) | Credit ($) | |
2017 | |||||
August | 31 | Accounts Payable | 360 | ||
Cash | 360 | ||||
(To record amount under-payable by accountant) |
Table (7)
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.
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Chapter 7 Solutions
Financial Accounting: Tools for Business Decision Making, 8th Edition
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