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Chapter 7: 16BE (page 364)

Horton Corporation is preparing a bank reconciliation and has identified the following potential reconciling items. For each item, indicate if it is (1) added to balance per bank statement, (2) deducted from balance per bank statement, (3) added to balance per books, or (4) deducted from balance per books.

(a) Deposit in transit \(5,500.

(d) Outstanding checks \)7,422.

(b) Bank service charges \(25.

(e) NSF check returned \)377.

(c) Interest credited to Horton鈥檚 account $31.

Short Answer

Expert verified

Item

Classification

(a) Deposit in transit $5,500.

Added to balance as per bank statement.

(b) Bank service charges $25.

Deducted from the balance as per books.

(c) Interest credited to Horton鈥檚 account $31.

Added to balance as per books.

(d) Outstanding checks $7,422.

Deducted from the balance as per bank statement.

(e) NSF check returned $377.

Deducted from the balance as per the book.

Step by step solution

01

Definition of Bank Passbook

A bank passbook can be defined as thediary reflecting all the deposits, withdrawals, and any other transaction occurring from the bank account.

02

Representation of each item

(a) Deposit in transit will increase the bank account balance. Therefore, it is added to the balance of the bank statement.

(b) Bank service charges reduce the bank balance; therefore, it is also deducted from the balance as per books.

(c) Interest credited to the account will increase the bank balance; therefore, it is also added to the balance as per books.

(d) Outstanding checks reduced the balance of the book balance. Therefore, it is also deducted from the balance of the bank statement.

(e) NSF checks returned by the bank will not be credited to the bank account. Therefore, it is deducted from the book balance.

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Most popular questions from this chapter

(Notes Receivable with Unrealistic Interest Rate) On December 31, 2015, Ed Abbey Co. performed environmental consulting services for Hayduke Co. Hayduke was short of cash, and Abbey Co. agreed to accept a $200,000 zero-interest-bearing note due December 31, 2017, as payment in full. Hayduke is somewhat of a credit risk and typically borrows funds at a rate of 10%. Abbey is much more creditworthy and has various lines of credit at 6%.

Instructions

(a) Prepare the journal entry to record the transaction of December 31, 2015, for the Ed Abbey Co.

(b) Assuming Ed Abbey Co.鈥檚 fiscal year-end is December 31, prepare the journal entry for December 31, 2016.

(c) Assuming Ed Abbey Co.鈥檚 fiscal year-end is December 31, prepare the journal entry for December 31, 2017.

Presented below are a number of independent situations.

Instructions

For each individual situation, determine the amount that should be reported as cash. If the item(s) is not reported as cash, explain the rationale.

1. Checking account balance \(925,000; certificate of deposit \)1,400,000; cash advance to subsidiary of \(980,000; utility deposit paid to gas company \)180.

2. Checking account balance \(600,000; an overdraft in special checking account at same bank as normal checking account of \)17,000; cash held in a bond sinking fund \(200,000; petty cash fund \)300; coins and currency on hand \(1,350.

3. Checking account balance \)590,000; postdated check from customer \(11,000; cash restricted due to maintaining compensating balance requirement of \)100,000; certified check from customer \(9,800; postage stamps on hand \)620.

4. Checking account balance at bank \(37,000; money market balance at mutual fund (has checking privileges) \)48,000; NSF check received from customer \(800.

5. Checking account balance \)700,000; cash restricted for future plant expansion \(500,000; short-term Treasury bills \)180,000; cash advance received from customer \(900 (not included in checking account balance); cash advance of \)7,000 to company executive, payable on demand; refundable deposit of $26,000 paid to federal government to guarantee performance on construction contract.

(Recording Bad Debts) Duncan Company reports the following financial information before adjustments.

Debit

Credit

Accounts receivables

\(100,000

Allowance for doubtful accounts

\)2,000

Sales revenue (All on credit)

900,000

Sales return and allowance

50,000

Instructions

Prepare the journal entry to record Bad Debt Expense assuming Duncan Company estimates bad debts at (a) 5% of accounts receivable and (b) 5% of accounts receivable but Allowance for Doubtful Accounts had a $1,500 debit balance.

What is the theoretical justification of the allowance method as contrasted with the direct write-off method of accounting for bad debts?

(Bank Reconciliation and Adjusting Entries) Logan Bruno Company has just received the August 31, 2017, bank statement, which is summarized below.

Country National Bank

Disbursement

Receipts

Balance

Balance August 1

\(9,369

Deposits during August

\)32,200

\(41,569

Note collected for depositor, including \)40 interest

1,040

42,609

Checks cleared during August

34,500

8,109

Bank service charges

20

8,089

Balance, August 31

8,089

The general ledger Cash account contained the following entries for the month of August.

Cash

Balance, August 1

10,050

Disbursement in August

34,903

Receipt during August

35,000

Deposits in transit at August 31 are \(3,800, and checks outstanding at August 31 total \)1,050. Cash on hand at August 31 is \(310. The bookkeeper improperly entered one check in the books at \)146.50 which was written for $164.50 for supplies (expense); it cleared the bank during the month of August.

Instructions

(a) Prepare a bank reconciliation dated August 31, 2017, proceeding to a correct balance.

(b) Prepare any entries necessary to make the books correct and complete.

(c) What amount of cash should be reported in the August 31 balance sheet?
See all solutions

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