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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’s 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’s 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

On July 1, 2017, Moresan Company sold special-order merchandise on credit and received in return an interest-bearing note receivable from the customer. Moresan will receive interest at the prevailing rate for a note of this type. Both the principal and interest are due in one lump sum on June 30, 2018.

On September 1, 2017, Moresan sold special-order merchandise on credit and received in return a zero-interest-bearing note receivable from the customer. The prevailing rate of interest for a note of this type is determinable. The note receivable is due in one lump sum on August 31, 2019.

Moresan also has significant amounts of trade accounts receivable as a result of credit sales to its customers. On October 1, 2017, some trade accounts receivable were assigned to Indigo Finance Company on a non-notification (Moresan handles collections) basis for an advance of 75% of their amount at an interest charge of 8% on the balance outstanding.

On November 1, 2017, other trade accounts receivable were sold without recourse. The factor withheld 5% of the trade accounts receivable factored as protection against sales returns and allowances and charged a finance charge of 3%.

Instructions

How should Moresan account for the trade accounts receivable factored on November 1, 2017? Why?

Jim Carrie Company shows a balance of \(181,140 in the Accounts Receivable account on December 31, 2017. The balance consists of the following.

Installment accounts due in 2018

\)23,000

Installment accounts due after 2018

34,000

Overpayment to vendors

2,640

Due from regular customers, of which $40,000 represents account pledge as security for a bank loan

79,000

Advances to employees

1,500

Advance to the subsidiary company (due in 2018)

81,000

Instructions

Illustrate how the information above should be shown on the balance sheet of Jim Carrie Company on December 31, 2017.

Corrs Wholesalers Co. sells industrial equipment for a standard 3-year note receivable. Revenue is recognized at time of sale. Each note is secured by a lien on the equipment and has a face amount equal to the equipment’s list price. Each note’s stated interest rate is below the customer’s market rate at date of sale. All notes are to be collected in three equal annual installments beginning one year after sale. Some of the notes are subsequently sold to a bank with recourse, some are subsequently sold without recourse, and some are retained by Corrs. At year end, Corrs evaluates all outstanding notes receivable and provides for estimated losses arising from defaults.

Instructions

What is the appropriate valuation basis for Corrs’s notes receivable at the date it sells equipment?

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account of \(600,000 and a commercial checking account balance of \)900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, \(5,000,000.

3. Travel advances of \)180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of \(1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of \)1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of \(190,000.

7. A bank overdraft of \)110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling \(500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2018, in the amount of \)125,000.

10. Eastwood has agreed to maintain a cash balance of \(500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased \)2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700.

Instructions

(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2017.

(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.

On September 30, 2016, Rolen Machinery Co. sold a machine and accepted the customer’s zero-interest-bearing note. Rolen normally makes sales on a cash basis. Since the machine was unique, its sales price was not determinable using Rolen’s normal pricing practices.

After receiving the first of two equal annual installments on September 30, 2017, Rolen immediately sold the note with recourse. On October 9, 2018, Rolen received notice that the note was dishonored, and it paid all amounts due. At all times prior to default, the note was reasonably expected to be paid in full.

Instructions

(1) How should Rolen determine the sales price of the machine?

(2) How should Rolen report the effects of the zero-interest-bearing note on its income statement for the year ended December 31, 2016? Why is this accounting presentation appropriate?

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