Question

P8-27A Preparing a bank reconciliation and journal entries The December eash records of Davidson Insurance follow: + Fit to width Learning Objective 6 Cash Receipts Date Cash Debit Dec 4 54,240 Cash Payments Check No. Cash Credit 1. Adjusted Balance 518,025 1416 550 600 1417 1418 $ 810 180 630 1,390 1,490 1,900 1419 1,860 1420 1421 700 1422 600 Davidson's Cash account shows a balance of $17.450 at December 31. On December 31, Davidson Insurance received the following bank statement $ 14,100 1.900 Bank Statement for December Beginning Balance Deposits and other Credits: Dec. 1 EFT 5350 Dec 5 4.240 Dec. 10 550 Dec. 15 500 Dec. 18 Dec 22 1.400 Checks and other Debit Dec. 8 NSF 400 Dec 11 (check no. 1416) Dec. 19 Dec 22 (check no. 1417) Dec. 29 (check no. 1418) Dec 31 (check no. 1419) 1.930 Dec. 31 Ending Balance $18.955 Explanations: BC-bank collection EFT-electronic funds transfer NSF nonsufficient funds checks SC-service charge Additional data for the bank reconciliation follow: a. The EFT credit was a recipt of rent. The EFT dcbit was an insurance payment b. The NSF check was received from a customer c. The $1,400 bank collection was for a note receivable. d. The correct amount of check na 1419, for rent expense, is 51,980. Davidson controller mistakenly recorded the check for $1,390.

Answer 1

Solution:

Bank statement is issued by a Bank to its depositors or customers. It is a document which shows the activities in the customers' account. It shows beginning and ending balances of cash receipts and payments for a particular period. Cash account is maintained in the company's general ledger. Cash is the medium of exchange and it has high liquidity. Internal controls are placed on such cash transactions. Reconciliation of cash book and bank statement is one of the internal controls placed on cash activities. Bank Reconciliation Statement (BRS) is a document which shows the reasons for the difference between a company's cash account in general ledger and the bank account maintained in the bank Bank side of bank reconciliation: This shows the bank side items not yet recorded by the bank or errors made by the bank. However, these are recorded by the company. The following items are included: Deposits in Transit, Outstanding checks and Bank errors Book side of bank reconciliation: It contains the items not yet recorded by the company on its books, or errors made by the company. However, these are recorded by the bank. It contains the following items: Electronic fund transfer, Service charges, Interest Revenue on checking Account, Non-sufficient Fund (NSF) checks, and Book errors.

1 Step1: Differentiate Reconciling items into Book side and Bank side of Bank reconciliation as below: Bank side: Outstanding checks Deposits in transit Book side: EFT rent collection Service charge NSF check Bank charge for printed checks Book error Direct collection from notes receivables

Step 2: Prepare the bank reconciliation statement as shown below: Bank reconciliation Bank Balance on December 31 Add Amount (S) Book $18,955 Balance on December 31 |Add Collection from notes receivables $1.860 EFT rent collection $20,815 Less Amount (S) $17,450 $1,400 $350 $19,200 Deposit in transit Less Outstanding checks(S1,490+S700+S$600) $2,790 Service charge NSF check $10 $400 EFT insurance payment Wrong crediting of cash amount as $1,390 instead of $1,930. ($1,930-$1,390,) S18.025 Adjusted book balance $225 $540 $18.025 Adjusted bank balance

Notes: 1. Deposits in transit represent the amount recorded by the company's cash book. These amounts are not reflected in the bank balance. So, make addition to the bank balance. 2. Outstanding checks represent the checks recorded by the company's cash book as issued, but it is not cleared by the bank. So it is to be deducted from the bank balance of bank reconciliation statement. 3. Electronic Fund Transfer (EFT) represents cash receipt or cash payment by the Bank on behalf of the customer (company). These cash receipts or payments are not yet recorded by the company's books. So, add EFT for Cash receipts and less EFT for cash payments. 4. Service charges represent the amount deducted by the bank, for the services provided to the customer. It is not recorded in the cash book. So, subtract this amount from the book balance 5. NSF check from customer means check issued when there are no sufficient funds in the bank account. These checks are deposited by the company in the bank. But these checks turned out to be worthless due to insufficient funds in the customer's bank account. It comes under book side of bank reconciliation. Subtract this amount from the book balance 6. Bank charges are deducted by the bank, from the customer's account. It is not recorded in cash book of the company. So, subtract this amount from the Book balance. 7. Company credited cash for $1,390 instead of $1,930. This means that company's cash balance is showing $540 more. It is an error made by the company. It affects only cash account of the company. So, subtract from Book balance. 8. Bank collected the amount of notes receivables from the customer directly. It is not recorded in the cash book. So, add to Book balance.

2 Journal entries for transactions in the Bank reconciliation are shown below: | Accounts and Explanation Debit (S) Credit (S) Date Dec.31 Bank expense 10 10 Cash (To record service charges deducted by the |bank as an expense) Explanation Service charge deducted by the bank is an expense. Expense should be debited on the income statement. Hence, debit bank expense account. Cash is gone out of the business and hence, credit cash account

Accounts and Explanation Cash Debit (S) Credit (S) 350 Date Dec.31 350 Rent To record collection of rent by the bank |through EFT) Explanation Amount of rent is directly collected by the bank through EFT. Rent collected is an income. Hence, credit Rent account. Cash is coming into the business and hence, debit Cash account

Accounts and Explanation Debit (S) Credit (S) 400 Date Dec.31 Accounts receivables 400 Cash (To record NSF check returned by the bank It increases the accounts recivables. Hence |debit it) Explanation When NSF check is returned back, there is an increase in the accounts receivables account. So, debit Accounts receivables account.

Date Dec.31 Insurance Accounts and Explanation Debit (S) Credit (S) 225 225 Cash To record the payment of insurance by the |bank throught EFT). Explanation Cash is paid out of the business and hence, credit cash account. Bank paid insurance charges directly. Insurance is an expense and hence, debit it.

Accounts and Explanation Rent expense Debit (S) Credit (S) 540 Date Dec.31 540 Cash (To record the rent expense) Explanation Rent expense is shown on the debit side of the income statement. Company credited cash for $1,390 instead of $1,930. This means that company's cash balance is showing $810 more. So, debit rent expense account and credit Cash account with $540

Accounts and Explanation Cash Debit (S) Credit (S) 1,400 Date Dec.31 1,400 Notes receivables |(To record the receipt of notes receivables) Explanation Bank collected amount from notes receivables. So, cash is coming into the business. Hence, debit cash account. To write off notes receivables, credit it.