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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

Accounting for petty cash Jackie鈥檚 Dance Studio created a \(220 imprest petty cash fund. During the month, the fund custodian authorized and signed petty cash tickets as follows: Petty Cash Ticket No. Item Account Debited Amount

1 Delivery of programs to customers Delivery Expense \) 20 2 Mail package Postage Expense 10 3 Newsletter Printing Expense 25 4 Key to closet Miscellaneous Expense 40 5 Copier paper Office Supplies 70

Requirements

1. Make the general journal entry to create the petty cash fund. Include an explanation.

2. Make the general journal entry to record the petty cash fund replenishment. Cash in the fund totals \(40. Include an explanation.

3. Assume that Jackie鈥檚 Dance Studio decides to decrease the petty cash fund to \)120. Make the general journal entry to record this decrease.

Applying internal control over cash payments by check

A purchasing agent for Franklin Office Supplies receives the goods that he purchases

and also approves payment for the goods.

Requirements

1. How could this purchasing agent cheat his company?

2. How could Franklin avoid this internal control weakness?

Correcting internal control weaknesses

Each of the following situations has an internal control weakness.

a. Jade Applications has decided that one way to cut costs in the upcoming year is to

fire the external auditor. The business believes that the internal auditor should be

able to efficiently monitor the company鈥檚 internal controls.

b. In an effort to minimize the amount of paperwork, Ross Homes has decided that it

will not keep copies of customer invoices related to sales revenue. Ross believes that

this effort will minimize the amount of data storage the company will have to pay for.

c. Elle Bee, a trusted employee for many years, has never taken a vacation. The owner

believes that he鈥檚 lucky that she is so committed to her job.

d. The Medicine Chest Company keeps a small petty cash fund to handle small cash

transactions. Because no one wants to volunteer to be the custodian, the business

manager has decided that all employees should have access to the petty cash. She

figures that as long as each employee fills out a petty cash ticket, then there are

proper controls in place.

e. Due to the cost of maintaining the security cameras, Wings and More has decided

that it will remove the cameras that monitor the cash register.

f. Bryan Miller, manager of Hardware Emporium, prides himself on hiring

exceptionally skilled employees who need no training to do their jobs.

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.

When are the only times the Petty Cash account is used in a journal entry?

Preparing a bank reconciliation and journal entries

The December cash records of Davidson Insurance follow:


Davidson鈥檚 Cash account shows a balance of \(17,450 at December 31. On December

31, Davidson Insurance received the following bank statement:

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 \)1,400 bank collection was for a note receivable.

d. The correct amount of check no. 1419, for rent expense, is \(1,930. Davidson鈥檚

controller mistakenly recorded the check for \)1,390.

Requirements

1. Prepare the bank reconciliation of Davidson Insurance at December 31, 2018.

2. Journalize any required entries from the bank reconciliation.
See all solutions

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