DISCUSSION QUESTIONS Suggested Responses 1. The signature card provides the bank with a copy of the official signature(s) of the person or persons authorized to sign checks. The bank can use it to verify signatures on any checks issued by the depositor. 2. A check must be endorsed when deposited in a bank, because the bank must have legal title to it in order to collect payment from the drawer of the check (the person or firm who wrote the check). 3. There is generally a difference between the balance in the Cash account on the company s books and the balance on the bank statement because of deposits in transit (deposits made but not in time for the current bank statement), outstanding checks (checks that you have written, but the bank has not yet honored or paid out), bank errors, bank credit memos, bank debit memos, or checkbook errors. 4. a. 2 d. 3 b. 3 e. 2 c. 4 5. It is necessary to make general journal entries for the ledger balance side of a bank reconciliation because the customer just learned from the statement about new transactions, such as bank service charges, that are not yet reflected in the books. 6. a. A Petty Cash Fund provides an efficient way for small immediate cash payments to be made instead of writing checks. b. The entry to establish the fund is a debit to Petty Cash Fund for $50, and a credit to Cash for $50. The entry to reimburse the fund is a debit to each account that petty cash funds were made for and a credit to Cash. 7. a. A debit balance in Cash Short and Over means there is a net shortage of cash. b. A debit balance appears on the income statement under Miscellaneous Expense. c. A credit balance in Cash Short and Over represents a net overage of cash. d. A credit balance appears on the income statement under Miscellaneous Income. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 269
SOLUTIONS TO EXERCISES Exercise 6-1 Bank Statement Balance Add: Deposit in transit Deduct: Outstanding checks No. 211 $212.00 No. 225 (b) 320.00 No. 228 318.00 Adjusted Bank Statement Balance (a) (c) $3,764.00 267.00 $4,031.00 850.00 $3,181.00 Ledger Balance of Cash Add: Note collected by bank Deduct: Bank service and collection charges (e) $ 12.00 NSF check from customer 74.00 Adjusted Ledger Balance of Cash (d) (f) $2,837.00 430.00 $3,267.00 86.00 $3,181.00 Exercise 6-2 1 20-- 1 2 July 31 Cash 717.50 2 3 Notes Receivable 700.00 3 4 Interest income 17.50 4 5 Collected principal and interest 5 6 on note from D. Dansky. 6 7 7 8 31 Cash 12.00 8 9 Accounts Payable 12.00 9 10 Error in recording Ck. No. 2225 10 11 in checkbook payable to Denton 11 12 Company. 12 13 13 14 31 Accounts Receivable 95.00 14 15 Cash 95.00 15 16 NSF check received from 16 17 J. Kenyon. 17 18 18 19 31 Miscellaneous Expense 29.00 19 20 Cash 29.00 20 21 Bank service and collection 21 22 charges. 22 23 23 270 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Exercise 6-3 Bank Statement Balance $3,600 Add: Deposit in transit 1,500 $5,100 Deduct: Outstanding checks 2,600 ($5,100 $2,500) Adjusted Bank Statement Balance $2,500 Exercise 6-4 ITEM ADD TO BANK STATEMENT BALANCE SUBTRACT FROM BANK STATEMENT BALANCE ADD TO LEDGER BALANCE OF CASH SUBTRACT FROM LEDGER BALANCE OF CASH a. A check-printing charge b. An outstanding check c. A deposit for $197 listed incorrectly on the bank statement as $179 d. e. A collection charge the bank made for a note it collected for its depositor A check written for $41.73 and recorded incorrectly in the checkbook as $41.37 f. A deposit in transit g. An NSF check received from a customer h. A check written for $82.40 and recorded incorrectly in the checkbook as $820.40 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 271
Exercise 6-5 Hosung Company Bank Reconciliation August 31, 20 Bank Statement Balance $1,383.00 Add: Error in recording check 237.25 $1,620.25 Deduct: Outstanding checks $260.50 425.10 331.00 1,016.60 Adjusted Bank Statement Balance $ 603.65 Ledger Balance of Cash $ 801.65 Add: Deduct: NSF check $180.00 Bank service and collection charges 18.00 198.00 Adjusted Ledger Balance of Cash $ 603.65 272 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Exercise 6-6 1 a. Petty Cash Fund 100.00 1 2 Cash 100.00 2 3 Established a Petty Cash Fund, 3 4 Ck. No. 857. 4 5 5 6 b. Store Supplies Expense 38.00 6 7 Office Supplies Expense 21.00 7 8 Miscellaneous Expense 39.00 8 9 Cash 98.00 9 10 Reimbursed the Petty Cash 10 11 Fund, Ck. No. 889. 11 12 12 13 c. Petty Cash Fund 50.00 13 14 Cash 50.00 14 15 Increased the amount of the 15 16 Petty Cash Fund, Ck. No. 891. 16 17 17 18 d. Store Supplies Expense 41.68 18 19 Delivery Expense 35.00 19 20 Miscellaneous Expense 19.90 20 21 Cash 96.58 21 22 Reimbursed the Petty Cash 22 23 Fund, Ck. No. 936. 23 24 24 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 273
Exercise 6-7 1 Cash 878.85 1 2 Cash Short and Over 2.55 2 3 Income from Services 881.40 3 4 To record revenue earned 4 5 during the day involving a cash 5 6 shortage of $2.55. 6 7 7 Exercise 6-8 a. On January 3, the cash register tape showed that sales were $1,520, whereas the cash count, after deducting the Change Fund, was $1,522. This means that there was a $2 overage. On January 4, the cash register tape showed that sales were $1,421, whereas the cash count, after deducting the Change Fund, was $1,418. This means that there was a $3 shortage. On January 6, the cash register tape showed that sales were $1,665, whereas the cash count, after deducting the Change Fund, was $1,664. This means that there was a $1 shortage. b. On the income statement, the $2 debit balance of Cash Short and Over is added to the debit balance of Miscellaneous Expense. (Credit Cash Short and Over, debit Miscellaneous Expense.) 274 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 6-1A Arthur's Men's Shop Bank Reconciliation November 30, 20 Bank Statement Balance $2,784.77 Add: Deposit in transit (November 30) 945.00 $3,729.77 Deduct: Outstanding checks No. 1420 $125.87 No. 1500 155.00 No. 1517 132.00 No. 1518 218.00 No. 1519 Adjusted Bank Statement Balance 128.85 759.72 $2,970.05 Ledger Balance of Cash $2,375.05 Add: Error in recording Check No. 1487 payable to M. A. Golden for personal use $ 9.00 Note collected (principal $600, interest $15, C. G. Tolson) 615.00 624.00 $2,999.05 Deduct: Bank service and collection charges 29.00 Adjusted Ledger Balance of Cash $2,970.05 1 20-- 1 2 Nov. 30 Cash 9.00 2 3 M. A. Golden, Drawing 9.00 3 4 Error in recording Check No. 1487. 4 5 5 6 30 Cash 615.00 6 7 Notes Receivable 600.00 7 8 Interest Income 15.00 8 9 Bank collected note signed 9 10 by C. G. Tolson. 10 11 11 12 30 Miscellaneous Expense 29.00 12 13 Cash 29.00 13 14 Bank service and collection 14 15 charges. 15 16 16 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 275
Problem 6-2A 1 20-- 1 2 May 1 Petty Cash Fund 150.00 2 3 Cash 150.00 3 4 Established Petty Cash Fund, 4 5 Ck. No. 956. 5 6 6 7 31 Office Supplies Expense 11.59 7 8 Delivery Expense 15.00 8 9 Miscellaneous Expense 44.09 9 10 B. Ellsworth, Drawing 25.00 10 11 Cash 95.68 11 12 Reimbursed Petty Cash Fund, 12 13 Ck. No. 1098. 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 276 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 6-2A (concluded) PETTY CASH PAYMENTS RECORD DISTRIBUTION OF PAYMENTS VOUCHER NO. EXPLANATION PAYMENTS OFFICE SUPPLIES EXPENSE DELIVERY EXPENSE MISC. EXPENSE OTHER ACCOUNTS ACCOUNT AMOUNT 1 20-- 1 2 May 1 Established fund, 2 3 Ck. No. 956, $150 3 4 3 1 Postage stamps 8.80 8.80 4 5 4 2 Taxi fare 12.00 12.00 5 6 6 3 Delivery charge 15.00 15.00 6 7 9 4 Withdrawal by B. Ellsworth, 7 8 B. Ellsworth 25.00 Drawing 25.00 8 9 13 5 Postage 8.29 8.29 9 10 19 6 Pens for office 6.00 6.00 10 11 23 7 Box of staples 3.59 3.59 11 12 28 8 Clean windows 15.00 15.00 12 13 29 9 Pencils for office 2.00 2.00 13 14 31 Totals 95.68 11.59 15.00 44.09 25.00 14 15 15 16 16 17 Balance in Fund $ 54.32 17 18 Reimbursed Ck. 18 19 No. 1098 95.68 19 20 Total $150.00 20 21 21 22 22 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 277
Problem 6-3A 1 20-- 1 2 July 28 Cash 893.50 2 3 Cash Short and Over 1.70 3 4 Income from Services 895.20 4 5 To record revenue earned 5 6 during the day involving a 6 7 cash shortage of $1.70. 7 8 8 9 29 Cash 975.80 9 10 Cash Short and Over 1.60 10 11 Income from Services 977.40 11 12 To record revenue earned 12 13 during the day involving a 13 14 cash shortage of $1.60. 14 15 15 16 30 Cash 886.60 16 17 Income from Services 884.50 17 18 Cash Short and Over 2.10 18 19 To record revenue earned 19 20 during the day involving a 20 21 cash overage of $2.10. 21 22 22 23 31 Cash 1,024.40 23 24 Cash Short and Over 2.85 24 25 Income from Services 1,027.25 25 26 To record revenue earned 26 27 during the day involving a 27 28 cash shortage of $2.85. 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 278 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 6-4A Baginski and Company Bank Reconciliation August 31, 20 Bank Statement Balance $1,323.00 Add: Deposit in transit (August 31) 599.00 $1,922.00 Deduct: Outstanding checks No. 928 $150.00 No. 929 292.00 442.00 Adjusted Bank Statement Balance $1,480.00 Ledger Balance of Cash $1,563.00 Add: Error in recording Check No. 925 payable to Jardin Company 27.00 $1,590.00 Deduct: NSF check from L. Pitts $ 95.00 Bank service and collection charges 15.00 110.00 Adjusted Ledger Balance of Cash $1,480.00 1 20-- 1 2 Aug. 31 Cash 27.00 2 3 Accounts Payable 27.00 3 4 Error in recording Ck. No. 925 4 5 payable to Jardin Company. 5 6 6 7 31 Accounts Receivable 95.00 7 8 Cash 95.00 8 9 NSF check received from L. Pitts. 9 10 10 11 31 Miscellaneous Expense 15.00 11 12 Cash 15.00 12 13 Bank service and collection 13 14 charges. 14 15 15 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 279
Problem 6-4A (concluded) CHECKS OUTSTANDING NOT CHARGED TO ACCOUNT No. 928 $ 150.00 929 292.00 THIS FORM IS PROVIDED TO HELP YOU BALANCE YOUR BANK STATEMENT BEFORE YOU START PLEASE BE SURE YOU HAVE ENTERED IN YOUR CHECK- BOOK ALL AUTOMATIC TRANSACTIONS SHOWN ON THE FRONT OF YOUR STATEMENT. YOU SHOULD HAVE ADDED IF ANY OCCURRED: 1. Loan advances. 2. Credit memos. 3. Other automatic deposits. YOU SHOULD HAVE SUB- TRACTED IF ANY OCCURRED: 1. Automatic loan payments. 2. Automatic savings transfers. 3. Service charges. 4. Debit memos. 5. Other automatic deductions and payments. ADD BANK BALANCE SHOWN ON THIS STATEMENT DEPOSITS NOT SHOWN ON THIS STATEMENT (IF ANY) $ 1,323.00 $ 599.00 TOTAL $ 1,922.00 SUBTRACT CHECKS OUTSTANDING $ 442.00 BALANCE $ 1,480.00 TOTAL $ 442.00 SHOULD AGREE WITH YOUR CHECKBOOK BALANCE AFTER DEDUCTING SERVICE CHARGE (IF ANY) SHOWN ON THIS STATEMENT. Please examine immediately and report if incorrect. If no reply is received within 10 days, the account will be considered correct. IN CASE OF ERRORS OR INQUIRIES ABOUT YOUR BILL Send your inquiry in writing on a separate sheet so that the creditor receives it within 60 days after the bill was mailed to you. Your written inquiry must include: 1. Your name and account number; 2. A description of the error and why (to the extent you can explain) you believe it is an error; and 3. The dollar amount of the suspected error. If you have authorized your creditor to automatically pay your bill from your checking or savings account, you can stop or re- verse payment on any amount you think is wrong by mailing your notice so that the creditor receives it within 11 days after the bill was sent to you. You remain obligated to pay the parts of your bill not in dispute, but you do not have to pay any amount in dispute during the time the creditor is resolving the dispute. During that same time, the creditor may not take any action to collect disputed amounts or report disputed amounts as delinquent. This is a summary of your rights; a full statement of your rights and the creditor's responsibilities under the Federal Fair Credit Billing Act will be sent to you both upon request and in response to a billing error notice. 280 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 6-1B Bank Statement Balance $3,490.72 Add: Deposit in transit (November 30) 525.30 Deduct: Merkle Company Bank Reconciliation November 30, 20 $4,016.02 Outstanding checks No. 732 $145.34 No. 743 42.00 No. 744 16.20 No. 745 119.00 No. 746 35.26 357.80 Adjusted Bank Statement Balance $3,658.22 Ledger Balance of Cash $3,219.72 Add: Note collected (principal $600, interest $7.50, O. L. Leland) 607.50 $3,827.22 Deduct: Cash withdrawal by C. R. Merkle $150.00 Bank service and collection charges 19.00 169.00 Adjusted Ledger Balance of Cash $3,658.22 1 20-- 1 2 Nov. 30 Cash 607.50 2 3 Notes Receivable 600.00 3 4 Interest Income 7.50 4 5 Bank collected note signed 5 6 by O. L. Leland. 6 7 7 8 30 Miscellaneous Expense 19.00 8 9 Cash 19.00 9 10 Bank service and collection 10 11 charges. 11 12 12 13 30 C. R. Merkle, Drawing 150.00 13 14 Cash 150.00 14 15 Withdrawal from ATM not recorded. 15 16 16 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 281
Problem 6-2B 1 20-- 1 2 Mar. 1 Petty Cash Fund 100.00 2 3 Cash 100.00 3 4 Established Petty Cash Fund, 4 5 Ck. No. 314. 5 6 6 7 31 Office Supplies Expense 6.50 7 8 Delivery Expense 17.90 8 9 Miscellaneous Expense 30.60 9 10 Advertising Expense 21.50 10 11 R. C. Stowe, Drawing 20.00 11 12 Cash 96.50 12 13 Reimbursed Petty Cash Fund, 13 14 Ck. No. 372. 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 22 23 23 24 24 25 25 26 26 27 27 28 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 38 38 282 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 6-2B (concluded) PETTY CASH PAYMENTS RECORD DISTRIBUTION OF PAYMENTS VOUCHER NO. EXPLANATION PAYMENTS OFFICE SUPPLIES EXPENSE DELIVERY EXPENSE MISC. EXPENSE OTHER ACCOUNTS ACCOUNT AMOUNT 1 20-- 1 2 Mar. 1 Established fund, 2 3 Ck. No. 314, $100 3 4 4 1 Taxi fare 7.60 7.60 4 5 7 2 Memo pads 6.50 6.50 5 6 9 3 Basketball Advertising 6 7 programs 21.50 Expense 21.50 7 8 16 4 Postage stamps 8.80 8.80 8 9 20 5 Snow removal 10.00 10.00 9 10 25 6 Delivery charge 12.00 12.00 10 11 28 7 Withdrawal by R. C. Stowe, 11 12 R. C. Stowe 20.00 Drawing 20.00 12 13 29 8 Postage 4.20 4.20 13 14 30 9 Delivery charge 5.90 5.90 14 15 31 Totals 96.50 6.50 17.90 30.60 41.50 15 16 16 17 17 18 Balance in Fund $ 3.50 18 19 Reimbursed fund, 19 20 Ck. No. 372 96.50 20 21 Total $100.00 21 22 22 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 283
Problem 6-3B 1 20-- 1 2 Apr. 1 Cash 385.50 2 3 Cash Short and Over 1.25 3 4 Income from Services 386.75 4 5 To record revenue earned 5 6 during the day involving a 6 7 cash shortage of $1.25. 7 8 8 9 2 Cash 585.75 9 10 Income from Services 582.65 10 11 Cash Short and Over 3.10 11 12 To record revenue earned 12 13 during the day involving a 13 14 cash overage of $3.10. 14 15 15 16 3 Cash 585.75 16 17 Cash Short and Over 0.90 17 18 Income from Services 586.65 18 19 To record revenue earned 19 20 during the day involving a 20 21 cash shortage of $0.90. 21 22 22 23 4 Cash 626.15 23 24 Incomes from Services 623.25 24 25 Cash Short and Over 2.90 25 26 To record revenue earned 26 27 during the day involving a 27 28 cash overage of $2.90. 28 29 29 30 30 31 31 32 32 33 33 34 34 35 35 36 36 37 37 284 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
Problem 6-4B Northern Motel Bank Reconciliation July 31, 20 Bank Statement Balance $1,576.06 Add: Deposit in transit (July 31) 630.00 $2,206.06 Deduct: Outstanding checks No. 1631 $118.20 No. 1632 78.20 No. 1633 178.36 374.76 Adjusted Bank Statement Balance $1,831.30 Ledger Balance of Cash $1,909.30 Add: Deduct: NSF check from T. R. Royce $ 37.00 Bank service and collection charges 23.00 Error in recording Check No. 1617 payable to Mitchel Company 18.00 78.00 Adjusted Ledger Balance of Cash $1,831.30 1 20-- 1 2 July 31 Accounts Receivable 37.00 2 3 Cash 37.00 3 4 NSF check received from 4 5 T. R. Royce. 5 6 6 7 31 Miscellaneous Expense 23.00 7 8 Cash 23.00 8 9 Bank service and collection 9 10 charges. 10 11 11 12 31 Accounts Payable 18.00 12 13 Cash 18.00 13 14 Error in recording Ck. No. 1617 14 15 payable to Mitchel Company. 15 16 16 17 17 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 285
Problem 6-4B (concluded) THIS FORM IS PROVIDED TO HELP YOU BALANCE YOUR BANK STATEMENT BEFORE YOU START CHECKS OUTSTANDING NOT CHARGED TO ACCOUNT No. 1631 $ 118.20 1632 78.20 1633 178.36 PLEASE BE SURE YOU HAVE ENTERED IN YOUR CHECK- BOOK ALL AUTOMATIC TRANSACTIONS SHOWN ON THE FRONT OF YOUR STATEMENT. YOU SHOULD HAVE ADDED IF ANY OCCURRED: 1. Loan advances. 2. Credit memos. 3. Other automatic deposits. YOU SHOULD HAVE SUB- TRACTED IF ANY OCCURRED: 1. Automatic loan payments. 2. Automatic savings transfers. 3. Service charges. 4. Debit memos. 5. Other automatic deductions and payments. ADD BANK BALANCE SHOWN ON THIS STATEMENT DEPOSITS NOT SHOWN ON THIS STATEMENT (IF ANY) $ 1,576.06 $ 630.00 TOTAL $ 2,206.06 SUBTRACT CHECKS OUTSTANDING $ 374.76 BALANCE $ 1,831.30 TOTAL $ 374.76 SHOULD AGREE WITH YOUR CHECKBOOK BALANCE AFTER DEDUCTING SERVICE CHARGE (IF ANY) SHOWN ON THIS STATEMENT. Please examine immediately and report if incorrect. If no reply is received within 10 days, the account will be considered correct. IN CASE OF ERRORS OR INQUIRIES ABOUT YOUR BILL Send your inquiry in writing on a separate sheet so that the creditor receives it within 60 days after the bill was mailed to you. Your written inquiry must include: 1. Your name and account number; 2. A description of the error and why (to the extent you can explain) you believe it is an error; and 3. The dollar amount of the suspected error. If you have authorized your creditor to automatically pay your bill from your checking or savings account, you can stop or reverse payment on any amount you think is wrong by mailing your notice so that the creditor receives it within 11 days after the bill was sent to you. You remain obligated to pay the parts of your bill not in dispute, but you do not have to pay any amount in dispute during the time the creditor is resolving the dispute. During that same time, the creditor may not take any action to collect disputed amounts or report disputed amounts as delinquent. This is a summary of your rights; a full statement of your rights and the creditor's responsibilities under the Federal Fair Credit Billing Act will be sent to you both upon request and in response to a billing error notice. 286 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part.
SOLUTIONS TO ACTIVITIES CONSIDER AND COMMUNICATE Suggested Response The Petty Cash Fund operation will be more efficient if the company requires a completed and signed voucher, listing date, amount paid, and the name of the account charged for every withdrawal. The company should limit the fund to business use by discouraging personal check cashing. Management should put the cash in a locked place and limit its access to you and perhaps one other responsible person you designate. The owner or accountant should monitor the amount in the fund to see that it is adequate and that all records are accurate. WHAT'S WRONG WITH THIS PICTURE? Suggested Response This practice is unethical and possibly illegal. While the amounts may be small, it is still the owner s job (after taxes) to attempt to make things balance after errors have been made. It is not your job. Also, if the owner does not know there are overages and shortages and the amount of each, no effort will be made to improve the company s process of handling cash. 2011 Cengage Learning. All Rights Reserved. May not be scanned, copied, duplicated, or posted to a publicly accessible website, in whole or in part. 287