P7-31B Preparing a bank reconciliation and journal entries
Learning Objective 5
1. Adjusted Balance $16,350
The May cash records of Durkin Insurance follow:
Durkin’s Cash account shows a balance of $16,340 at May 31. On May 31, Durkin 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 $1,200 bank collection was for a note receivable.
d. The correct amount of check 1419, for rent expense, is $1,960. Durkin’s controller mistakenly
recorded the check for $1,690.
7-38
Requirements
1. Prepare the bank reconciliation of Durkin Insurance at May 31, 2016.
2. Journalize any required entries from the bank reconciliation.
SOLUTION
Requirement 1
DURKIN INSURANCE
Bank Reconciliation
May 31, 2016
BANK
BOOK
Requirement 2
Date
Accounts and Explanation
Debit
Credit
May 31
Cash
200
Rent Revenue
200
To record EFT rent collection.
31
Cash
Notes Receivable
31
Rent Expense
270
Cash
270
31
Accounts Receivable
500
Cash
500
31
Insurance Expense
600
600
31
Bank Expense
To record bank service charges incurred.
7-40
P7-32B Preparing a bank reconciliation and journal entries
Learning Objective 5
1. Book Deductions $490
The October 31 bank statement of Wollaston’s Healthcare has just arrived from State Bank. To prepare
the bank reconciliation, you gather the following data:
a. The October 31 bank balance is $5,580.
d. Wollaston’s collects from a few customers by EFT. The October bank statement lists a $1,500 EFT
deposit for a collection on account.
e. The bank statement includes two special deposits that Wollaston’s hasn’t recorded yet: $850 for
dividend revenue and $30 for the interest revenue Wollaston’s earned on its bank balance during
October.
f. The bank statement lists a $10 subtraction for the bank service charge.
g. On October 31, the Wollaston’s treasurer deposited $320, but this deposit does not appear on the
bank statement.
h. The bank statement includes a $500 deduction for a check drawn by Multi-State Freight Company.
Wollaston’s notified the bank of this bank error.
i. Wollaston’s Cash account shows a balance of $2,900 on October 31.
Requirements
1. Prepare the bank reconciliation for Wollaston’s Healthcare at October 31, 2016.
2. Journalize any required entries from the bank reconciliation. Include an explanation for each entry.
SOLUTION
Requirement 1
WOLLASTON’S HEALTHCARE
Bank Reconciliation
October 31, 2016
BANK
BOOK
30
10
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Oct. 31
Cash
1,500
Accounts Receivable
1,500
To record EFT collection on account.
31
Cash
Dividend Revenue
31
Cash
Interest Revenue
31
Accounts Receivable ($370 + $110)
Cash
31
Bank Expense
7-42
Continuing Problem
P7-33 Preparing a bank reconciliation and journal entries
This problem continues the Daniels Consulting situation from Problem P6-38 of Chapter 6. Daniels’s
March Cash T-account from its general ledger is as follows:
Daniels’s bank statement dated March 31, 2017, follows:
Requirements
1. Prepare the March bank reconciliation.
2. Journalize any transactions required from the bank reconciliation. Compute the adjusted account
balance for the Cash T-account, and denote the balance as End. Bal.
7-43
SOLUTION
Requirement 1
DANIELS CONSULTING
Bank Reconciliation
March 31, 2017
BANK
BOOK
Balance, March 31, 2017
$ 49,123
Balance, March 31, 2017
$ 51,670
Deposit in transit
EFT collection from Hip Hop
$ 52,803
Interest revenue
$ 52,245
LESS:
LESS:
Outstanding checks
EFT payment to Paper Products
$ 34
No. 210
EFT payment to The Cable Co.
No. 211
Service charge
March 31, 2017
$ 52,113
31, 2017
$ 52,113
7-44
P7-33, cont.
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Mar. 31
Cash
550
Accounts Receivable
550
To record EFT collection from Hip Hop Hats.
31
Cash
Interest Revenue
31
Office Supplies
Cash
31
Utilities Expense
Cash
31
Bank Expense
To record bank service charges incurred.
Mar. 31 550
85 Mar. 31
Mar. 31 25
13 Mar. 31
Mar. 31 End. Bal 52,113
Cash
Mar. 31 Bal 51,670
34 Mar. 31
7-45
Practice Set
This problem continues the Crystal Clear Cleaning problem from Problem P6-39 of Chapter 6.
P7-34 Preparing a bank reconciliation and journal entries
The bank statement dated February 28, 2018, for Crystal Clear follows:
Additional data for the bank reconciliation follow:
a. The company had the following EFT transactions:
• EFT credit on February 23 was a receipt of cash for services on account
• EFT debit on February 2 was a payment for printing of business checks
• EFT debit on February 28 was a payment for utilities
Requirements
1. Prepare the bank reconciliation.
2. Journalize any required entries from the bank reconciliation.
SOLUTION
Requirement 1
CRYSTAL CLEAR CLEANING
Bank Reconciliation
February 28, 2018
BANK
BOOK
Balance, February 28, 2018
$ 78,671
Balance, February 28, 2018
$ 78,750
Restaurant
$ 79,571
Interest revenue
LESS:
LESS:
Outstanding checks
EFT payment to Check Art
No. 238
EFT payment to Texas Energy
No. 241
200
550
Service charge
February 28, 2018
2018
$ 79,021
Requirement 2
Date
Accounts and Explanation
Debit
Credit
Feb. 28
Cash
450
Accounts Receivable—Weiler’s Restaurant
450
To record EFT collection from customer.
28
Cash
Interest Revenue
28
Bank Expense
Cash
28
Utilities Expense
140
Cash
140
28
Bank Expense
To record bank service charges incurred.
Critical Thinking
7-47
Decision Case 7-1
Conduct an Internet search for information on internal control and Sarbanes-Oxley. Write a report of
your findings. In your report, discuss some of the advantages and disadvantages of Sarbanes-Oxley.
Present it to your class (if required by your instructor).
SOLUTION
Decision Case 7-2
This case is based on an actual situation. Centennial Construction Company, headquartered in Dallas,
Texas, built a Rodeway Motel 35 miles north of Dallas. The construction foreman, whose name was
Slim Chance, hired the 40 workers needed to complete the project. Slim had the construction workers
fill out the necessary tax forms, and he sent their documents to the home office.
Work on the motel began on April 1 and ended September 1. Each week, Slim filled out a timecard of
hours worked by each employee during the week. Slim faxed the timecards to the home office, which
prepared the payroll checks on Friday morning. Slim drove to the home office on Friday, picked up the
payroll checks, and returned to the construction site. At 5 p.m. on Friday, Slim distributed payroll
checks to the workers.
Requirements
1. Describe in detail the main internal control weakness in this situation. Specify what negative
result(s) could occur because of the internal control weakness.
2. Describe what you would do to correct the internal control weakness.
SOLUTION
Requirement 1
The main problem with the situation is that one person, the foreman, is responsible for all aspects of the
Requirement 2
Ideally, the distribution of the paychecks should be done by someone other than the foreman, so that if
7-49
Fraud Case 7-1
Levon Helm was a kind of one-man mortgage broker. He would drive around Tennessee looking for
homes that had second mortgages, and if the criteria were favorable, he would offer to buy the second
mortgage for “cash on the barrelhead.” Helm bought low and sold high, making sizable profits. Being a
small operation, he employed one person, Cindy Patterson, who did all his bookkeeping. Patterson was
an old family friend, and he trusted her so implicitly that he never checked up on the ledgers or the bank
reconciliations. At some point, Patterson started “borrowing” from the business and concealing her
transactions by booking phony expenses. She intended to pay it back someday, but she got used to the
extra cash and couldn’t stop. By the time the scam was discovered, she had drained the company of
funds that it owed to many of its creditors. The company went bankrupt, Patterson did some jail time,
and Helm lost everything.
Requirements
1. What was the key control weakness in this case?
2. Many small businesses cannot afford to hire enough people for adequate separation of duties. What
can they do to compensate for this?
SOLUTION
Requirement 1
There was no separation of duties between cash disbursements and recording transactions in the journal,
7-50
Financial Statement Case 7-1
Accounting Firm) of Starbucks Corporation and the Starbucks Corporation financial statements. Answer
the following questions about the company:
Requirements
1. What is the name of Starbucks’s outside auditing firm (independent registered public accounting
firm)? What office of this firm signed the audit report? How long after the Starbucks year-end did
the auditors issue their opinion?
2. Who bears primary responsibility for maintaining effective internal control over financial reporting?
How can you tell?
3. Does it appear that Starbucks’s internal controls are adequate? How can you tell?
4. What standard of auditing did the outside auditors use in examining the Starbucks financial
statements?
5. By how much did Starbucks’s cash balance (including cash equivalents) change during year ended
September 29, 2013? What were the beginning and ending cash balances?
6. Review the notes to the consolidated financial statements, specifically Note 1 dealing with Cash and
Cash Equivalents. What type of instruments does Starbucks consider to be cash equivalents?
7. Determine Starbucks’s cash ratio as of September 29, 2013, and September 30, 2012. How do
Starbucks’s cash ratios compare with Green Mountain Coffee Roasters as illustrated in the
chapter? Explain.
SOLUTION
Requirement 1
7-51
Requirement 7
(Numbers in millions)
September 29,
2013
September 30, 2012
Cash and Cash Equivalents
$2,575.7
$1,188.6
Divided by Total Current Liabilities
5,377.3
2,209.8
Cash Ratio
0.479
0.538
Communication Activity 7-1
In 100 words or fewer, explain why there may be a difference between the bank statement ending cash
balance and the ending balance in the Cash account. Give at least two examples each of adjustments to
the bank balance and to the book balance.
SOLUTION
The books and the bank statement show different cash balances because of timing differences in
recording transactions such as: