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Chapter 7: Q8SE (page 413)

: Identifying timing differences related to a bank reconciliation

For each timing difference listed, identify whether the difference would be reported on

the book side of the reconciliation or the bank side. In addition,

identify whether the difference would be an addition or subtraction.

a. Deposit in transit

b. Bank collection

c. Debit memorandum from bank

d. EFT cash receipt

e. Outstanding checks

f. \(1,000 deposit erroneously recorded

by the bank as \)100

g. Service charges

h. Interest revenue

i. \(2,500 cash payment for rent

expense erroneously recorded by

the business as \)250

j. Credit memorandum from bank

Short Answer

Expert verified

Deposit in transit will affect the bank side of reconciliation.

Step by step solution

01

Definition of the bank reconciliation statement

Bank reconciliation is a statement that is prepared to match the cash and bank balance of the company.

02

Effect of the timing difference

  1. Deposit in transit: Deposit in transit would be reported on the bank side of the reconciliation, and the difference is added.
  2. Bank collection: It is the type of receipt directly received by the bank, and this amount is not recorded in the company鈥檚 books. Hence this will affect the book side of the company, and it is added.
  3. Debit memorandum from the bank: A debit memorandum from the bank is the type of deduction that the bank deducts. It is recorded in the bank statement, but it is not recorded in the book side of the company. Hence, this would affect the book side of the company, and it is subtracted from the balance.
  4. EFT cash receipts: The difference in the EFT receipts would be recorded in the book side of the company. The EFT receipts will be added as EFT receipts.
  5. Outstanding Checks: The outstanding checks are recorded on the bank side of the reconciliation. This will be deducted as outstanding checks.
  6. $1,000 deposit erroneously recorded by the bank as $100: This difference will be recorded on the bank side, and the difference amount is added.
  7. Service Charges: Service charges are the charges that are deducted by the bank directly. Hence, it will affect the book side, subtracted as a service charge from the balance.
  8. Interest Revenue: Interest revenue is a deposit made by the bank. Hence it would affect the book side, and it is added to the balance.
  9. $2,500 cash payment for rent expense erroneously recorded by the business as $250: This is what is made in the company鈥檚 books; hence, this affects the book side, and the difference amount is deducted from the cash balance.
  10. Credit memorandum from bank: A credit memorandum is a type of receipt received from the bank. It affects the book side of the company, and it is added to the cash balance.

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Most popular questions from this chapter

What is a bank reconciliation?

Fill in the missing information.

a. The vendor ships the inventory and sends a(n) __________ back to the purchaser.

b. After approving all documents, the purchaser sends a(n) __________ to the vendor.

c. When ordering merchandise inventory, the purchaser sends a(n) __________ to the vendor.

d. The purchaser receives the inventory and prepares a(n) __________.

What are some limitations of internal controls?

Preparing a bank reconciliation and journal entries

The May cash records of Donald Insurance follow:

Cash Receipts Cash Payments

Date Cash Debit Check No. Cash Credit

May 4 \( 4,230 1416 \) 890

9 520 1417 120

14 530 1418 630

17 1,950 1419 1,090

31 1,840 1420 1,420

1421 900

1422 670

Donald鈥檚 Cash account shows a balance of \(17,750 at May 31. On May 31, Donald

Insurance received the following bank statement:

Deposits and other Credits:

May 10

May 1

May 5

May 15

May 18

May 22

Checks and other Debits:

8

11 (check no. 1416)

19

22 (check no. 1417)

29 (check no. 1418)

31 (check no. 1419)

May

May

May

May

May

May

May 31

Ending Balance

Beginning Balance

EFT \) 450

NSF

EFT

BC

\( 18,730

1,700

890

1,100

120

520

4,230

530

1,950

\) 14,400

9,380

375

630

1,900

35 (5,050)

Bank Statement for May

SC

Explanations: BC鈥揵ank collection; EFT鈥揺lectronic funds transfer;

NSF鈥搉onsufficient funds checks; SC鈥搒ervice charge

Additional data for the bank reconciliation follow:

a. The EFT credit was a receipt of rent. The EFT debit was an insurance

payment.

b. The NSF check was received from a customer.

c. The \(1,700 bank collection was for a note receivable.

d. The correct amount of check 1419, for rent expense, is \)1,900. Donald鈥檚 controller

mistakenly recorded the check for $1,090.

Requirements

1. Prepare the bank reconciliation of Donald Insurance at May 31, 2018.

2. Journalize any required entries from the bank reconciliation

Correcting internal control weaknesses

Each of the following situations has an internal control weakness.

a. Upside-Down Applications develops custom programs to customers鈥� specifications.

Recently, development of a new program stopped while the programmers

redesigned Upside-Down鈥檚 accounting system. Upside-Down鈥檚 accountants could

have performed this task.

b. Norma Rottler has been your trusted employee for 24 years. She performs all cashhandling

and accounting duties. Norma just purchased a new luxury car and a new

home in an expensive suburb. As owner of the company, you wonder how she

can afford these luxuries because you pay her only $30,000 a year and she has no

source of outside income.

c. Izzie Hardwoods, a private company, falsified sales and inventory figures in order

to get an important loan. The loan went through, but Izzie later went bankrupt and

could not repay the bank.

d. The office supply company where Pet Grooming Goods purchases sales receipts

recently notified Pet Grooming Goods that its documents were not prenumbered.

Howard Mustro, the owner, replied that he never uses receipt numbers.

e. Discount stores such as Cusco make most of their sales in cash, with the remainder

in credit card sales. To reduce expenses, one store manager ceases purchasing

fidelity bonds on the cashiers.

f. Cornelius鈥檚 Corndogs keeps all cash receipts in an empty box for a week because

the owner likes to go to the bank on Tuesdays when Joann is working.

Requirements

1. Identify the missing internal control characteristics in each situation.

2. Identify the possible problem caused by each control weakness.

3. Propose a solution to each internal control problem.
See all solutions

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