Question

Could you please tell me how to find the answers to this question?

The Cash account in the general ledger of Lyco Corporation showed a balance of $21,749 at December 31 (but prior to performing a bank reconciliation). The company'sbank statement showed a balance of $22,000 at the same date. The only reconciling items consisted of: (1) a $5,000 deposit in transit, (2) a bank service charge of$200, (3) outstanding checks totaling $9,000, (4) a $3,000 check marked "NSF" from Susque Company, one of Lyco's customers, and (5) a check written for office suppliesin the amount of $1,832, recorded by the company's bookkeeper as a debit to Office Supplies of $1,283, and a credit to Cash of $1,283.

In addition to the above information, Lyco owned the following financial assets at December 31: (1) a money market account of $60,000, (2) $3,000 of high-grade,120-day commercial paper, and (3) $5,000 of highly liquid stock investments.

I'm trying to get the adjusted cash balance for a bank reconciliation. I don't understand what I'm doing wrong.

My thoughts are that the Error Corrections is $549 (1832-1283), but the computer is saying that's wrong.
I also think that the NSF check is $3000, but the computer's saying THAT'S wrong.
I would think that the bank service charge is $200, but the computer says that's wrong also.
My guess for outstanding checks is $9000. Is it a computer error or am I just totally jacked up? I read the chapter twice and I think I'm doing it right? If anyone canhelp, I would really appreciate it. I've been on this problem for an hour now and it's driving me crazy!

Answer 1

Bank Reconciliation Statement:

It is a statement, which reconciles the difference between the balance shown on the bank statement and the balance shown in the depositor’s cash account. When payments are made by the company through checks, the company records it as payment and decreases its cash balance. But, the customer may present the check after the recording period, so it may not be shown on the bank statement for the current period and this leads to a difference in the bank statement and a cash account. In the same manner, there may be deposits in transit. These differences are called as Timing differences. So, these differences are explained through a bank reconciliation statement.

A business shall update its cash account by using the bank reconciliation statement. In a bank reconciliation statement, adjustments are made to the bank balance and book balance. Outstanding checks, deposits in transit and bank errors, etc. shall be adjusted to the bank balance. NSF checks, service charge, interest revenue, cash book errors and electronic fund transfers, etc. shall be adjusted to the book balance. Adjusted bank balance must always be equal to adjusted book balance.

Cash and Cash equivalents: Any business will not keep huge reserves of cash with them, because keeping idle cash give zero returns. Basically, cash is the most liquid asset compared to other assets. So, companies invest cash in safe and highly liquid investments like money market account and Treasury bills, etc. which are almost same as cash. So, these investments are called as cash equivalents. To have called them as cash equivalents, they must be highly liquid investments and shall be matured within 90 days of acquisition. However, highly liquid stock does not come under cash and cash equivalents, because they are not safe and stable investments,

a.

Prepare the Bank reconciliation as shown below:

• Deposit in transit increases the book balance of company and are not recorded in the bank statement, so they are added to the bank balance.

• Outstanding checks are not cleared by the bank and decreases the book balance of the company, so they are deducted from the bank balance.

• Bank Service charge is not recorded in the books and decreases the bank balance, so now they are deducted from the book balance.

• Error in cash book: As there is an error in the cash book, adjustment shall be made to the book balance. Business wrongly credited cash for $1,832 instead of $1,283. Now, the book balance shall be reduced by $549 ($1,832-$1,283).

• NSF Check: As the check of the customers has been returned due to insufficient of funds, the balance in the customer’s account has not been increased. So, business must show it as accounts receivable and not as cash received. Therefore, NSF check of $3,000 should be subtracted from the book balance.

b.

Determine the cash and cash equivalents as shown below:

Cash and cash equivalents includes cash and financial assets. But $3,000 of high-grade, 120-day commercial paper will not come under cash and cash equivalents because it did not satisfy the condition of 90 days maturity period. Highly liquid stock investments are not cash equivalents.

c.

Prepare the journal entry to update the accounting records as shown below:

Explanation:

Cash is an asset and should be credited when cash is paid. In the above entry, cash balance decreases, so cash account is credited.

Increase in expense should be debited. Bank service charge is an expense, so bank service charges account is debited.

Accounts receivable is an asset and should be debited when its balance increase. In the above entry, accounts receivable balance increases, so Accounts receivable account is debited.

Office supplies is an asset and should be debited when its balance increase. In the above entry, supplies balance increases, so office supplies account is debited.