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Chapter 7: Question P7-12 (page 374)

(Petty Cash, Bank Reconciliation) Bill Jovi is reviewing the cash accounting for Nottleman, Inc., a local mailing service. Jovi’s review will focus on the petty cash account and the bank reconciliation for the month ended May 31, 2017. He has collected the following information from Nottleman’s bookkeeper for this task.

Petty Cash

1. The petty cash fund was established on May 10, 2017, in the amount of \(250.

2. Expenditures from the fund by the custodian as of May 31, 2017, were evidenced by approved receipts for the following.

Postage expenses

\)33.00

Mailing Labels and Other Supplies

65.00

I.O.U from employees

30.00

Shipping charges

57.45

Newspaper advertising

22.80

Miscellaneous expenses

15.35

On May 31, 2017, the petty cash fund was replenished and increased to \(300; currency and coin in the fund at that time totaled \)26.40.

Bank Reconciliation

THIRD NATIONAL BANK

BANK STATEMENT

Disbursements

Receipts

Balance

Balance 1 May, 2017

\(8,769

Deposits

\)28,000

Note payment direct from customer (\(30)

930

Check clearing during May

\)31,150

Bank service charges

27

Balance 31 May, 2017

6,522

Nottleman’s Cash Account

Balance 1 May 2017

\(8,850

Deposit during May 2017

31,000

Checks written during May 2017

(31,835)

Deposits in transit are determined to be \)3,000, and checks outstanding at May 31 total \(850. Cash on hand (besides petty cash) at May 31, 2017, is \)246.

Instructions

(a) Prepare the journal entries to record the transactions related to the petty cash fund for May.

(b) Prepare a bank reconciliation dated May 31, 2017, proceeding to a correct cash balance, and prepare the journal entries necessary to make the books correct and complete.

(c) What amount of cash should be reported in the May 31, 2017, balance sheet?

Short Answer

Expert verified

$9,218 will be reported as cash in the company’s balance sheet.

Step by step solution

01

Definition of Petty Cash

A separate account maintained by a business entity for funding daily expenses of the business with small amounts such as refreshment, postage, and stationery is known as petty cash.

02

Journal entries relating to petty cash

Date

Accounts and Explanation

Debit $

Credit $

10 May 2017

Petty Cash

$250

Cash

$250

31 May 2017

Postage expenses

$33.00

Mailing Labels and Other Supplies

$65.00

I.O.U from employees

$30.00

Shipping charges

$57.45

Newspaper advertising

$22.80

Miscellaneous expenses

$15.35

Cash

$223.60

31 May 2017

Petty Cash

$50

Cash

$50

03

Bank Reconciliation Statement

Particular

Amount $

Amount $

Balance as per bank

$6,522

Add:

Cash in hand

$246

Deposit in transit

3,000

3,246

Less: Outstanding checks

(850)

$8,918

Balance as per books$8,850+$31,000-$31,835

8,015

Add: Note receivable

930

Less: Bank charges

(27)

Correct cash balance

$8918

Journal entries:

Date

Accounts and Explanation

Debit $

Credit $

31 May 2017

Cash

$930

Note Receivable

$900

Interest revenue

$30

31 May 2017

Bank charges

$27

Cash

$27

04

Cash to be Reported on the Balance Sheet

Particular

Amount $

Correct cash balance

$8,918

Add: petty cash

300

Cash balance reported on the balance sheet

$9,218

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Most popular questions from this chapter

(Accounting for Zero-Interest-Bearing Note) Soon after beginning the year-end audit work on March 10 at Engone Company, the auditor has the following conversation with the controller.

Controller: The year ended March 31st should be our most profitable in history and, as a consequence, the board of directors has just awarded the officers generous bonuses.

Auditor: I thought profits were down this year in the industry, according to your latest interim report.

Controller: Well, they were down, but 10 days ago we closed a deal that will give us a substantial increase for the year.

Auditor: Oh, what was it?

Controller: Well, you remember a few years ago our former president bought stock in Henderson Enterprises because he had those grandiose ideas about becoming a conglomerate. For 6 years we have not been able to sell this stock, which cost us \(3,000,000 and has not paid a nickel in dividends. Thursday we sold this stock to Bimini Inc. for \)4,000,000. So, we will have a gain of \(700,000 (\)1,000,000 pretax) which will increase our net income for the year to \(4,000,000, compared with last year’s \)3,800,000. As far as I know, we’ll be the only company in the industry to register an increase in net income this year. That should help the market value of the stock!

Auditor: Do you expect to receive the \(4,000,000 in cash by March 31st, your fiscal year-end?

Controller: No. Although Bimini Inc. is an excellent company, they are a little tight for cash because of their rapid growth. Consequently, they are going to give us a \)4,000,000 zero-interest-bearing note with payments of $400,000 per year for the next 10 years. The first payment is due on March 31 of next year.

Auditor: Why is the note zero-interest-bearing?

Controller: Because that’s what everybody agreed to. Since we don’t have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on the Henderson Enterprises stock.

Instructions

Do you agree with the way the controller has accounted for the transaction? If not, how should the transaction be accounted for?

Indicate three reasons why a company might sell its receivables to another company.

On December 31, 2017, Firth Company borrowed \(62,092 from Paris Bank, signing a 5-year, \)100,000 zero-interest-rate note. The note was issued to yield 10% interest. Unfortunately, during 2019, Firth began to experience financial difficulty. As a result, at December 31, 2019, Paris Bank determined that it was probable that it would collect only $75,000 at maturity. The market rate of interest on loans of this nature is now 11%.

Instructions

(a) Prepare the entry (if any) to record the impairment of the loan on December 31, 2019, by Paris Bank.

(b) Prepare the entry on March 31, 2020, if Paris learns that Firth will be able to repay the loan under the original terms.

(Notes Receivable Journal Entries) On December 31, 2017, Oakbrook Inc. rendered services to Beghun Corporation at an agreed price of \(102,049, accepting \)40,000 down and agreeing to accept the balance in four equal installments of $20,000 receivable each December 31. An assumed interest rate of 11% is imputed.

Instructions

Prepare the entries that would be recorded by Oakbrook Inc. for the sale and the receipts and interest on the following dates (prepare an amortization schedule). (Assume that the effective-interest method is used for amortization purposes.)

(a) December 31, 2017.

(b) December 31, 2018.

(c) December 31, 2019.

(d) December 31, 2020.

(e) December 31, 2021.

(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?
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