- A company's adjusted cash balance at month-end is determined to be ($15,200). The bank reconciliation for the month included deposits in transit of ($3,000), outstanding checks of ($1,800), and bank service charges of ($40). What was the unadjusted balance on the bank statement before any reconciling items were considered?
Answer: ($14,000)
The formula to reconcile the bank balance is: Unadjusted Bank Balance + Deposits in Transit - Outstanding Checks = Adjusted Cash Balance. We can work backward from the adjusted balance to find the unadjusted bank balance. The service charge is a book reconciling item and is irrelevant for this calculation.
Let 'X' be the unadjusted bank balance:
X+$3,000−$1,800=$15,200
X+$1,200=$15,200
X=$15,200−$1,200
X=$14,000
Distractor B represents reversing the signs for deposits in transit and outstanding checks ($15,200−$3,000+$1,800=$14,000). Distractor C incorrectly adjusts the adjusted balance for a book-side item. Distractor D incorrectly adjusts the unadjusted bank balance for a book-side item. - A company's bank statement shows a ($20) service charge, a ($10) credit for interest earned, and a credit memo for a ($500) note receivable collected by the bank. The company also has ($300) in deposits in transit and ($250) in outstanding checks. Which of these items will require a debit to the Cash account in the company's general ledger?
Answer: The note receivable and the interest earned.
Journal entries, including debits to Cash, are required for items that adjust the book balance, not the bank balance. Deposits in transit and outstanding checks are bank-side reconciling items and do not require new journal entries. The service charge requires a credit to Cash. The interest earned and the note collected both increase the company's cash balance and were unknown before the bank statement, so they require adjusting entries that include a debit to the Cash account.
- During a bank reconciliation, a company notes that check #123 for ($560) was written to pay for supplies but was incorrectly recorded in the cash payments journal as ($650). This check is listed among the cleared checks on the bank statement. Which of the following is the correct reconciling adjustment?
Answer: Add ($90) to the balance per books.
The error occurred in the company's records (the cash payments journal), so the adjustment must be made to the company's book balance. The company recorded a cash payment of ($650), but the actual payment was only ($560). This means the cash payment was overstated by ($90) ($650−$560), causing the book cash balance to be understated by ($90). To correct this, ($90) must be added back to the balance per books. - A company's unadjusted cash balance per books is ($9,000). The company's bank reconciliation reveals the following: outstanding checks, ($2,000); deposits in transit, ($1,500); bank service charge, ($50); and interest earned on the account, ($100). What amount of cash should be reported on the balance sheet?
Answer: ($9,050)
The cash amount reported on the balance sheet should be the adjusted, or correct, cash balance. To find this, we must adjust the book balance for any items the company was unaware of before the reconciliation. Outstanding checks and deposits in transit are bank-side adjustments and do not affect the book balance directly.
- Unadjusted book balance: ($9,000)
- Add: Interest earned ($100)
- Deduct: Bank service charge (($50))
- Adjusted cash balance = $9,000+$100−$50=$9,050
This is the correct amount to report on the balance sheet. - A company's bookkeeper correctly wrote a check to a supplier for ($271) but erroneously recorded it as ($721) in the cash disbursements journal. The bank processed the check for the correct amount of ($271). How should this error be treated on the company's bank reconciliation?
Answer: As an addition of ($450) to the balance per books.
This is a company recording error, so it must be corrected on the book side of the reconciliation. The company recorded a cash disbursement of ($721) when the actual disbursement was only ($271). This means the company's book cash balance was decreased by ($450) too much ($721−$271). To correct this overstatement of cash paid out, the company must add ($450) back to its cash balance per books. - Information for Jasper Corp. for the month of May is as follows:
- Balance per bank statement: ($38,400)
- Balance per cash account: ($37,850)
- Deposits in transit: ($5,300)
- Bank service charge: ($150)
- Note collected by bank (including ($200) interest): ($4,000)
- A check written for ($1,200) was correctly paid by the bank but recorded by Jasper as ($2,100).
What is the total amount of outstanding checks for May?
Answer: ($1,100)
First, calculate the adjusted cash balance from the book side. Then, use that balance to solve for the outstanding checks on the bank side.
Book Reconciliation:
- Balance per books: ($37,850)
- Add: Note collected ($4,000)
- Add: Book error ($2,100recorded−$1,200actual=$900 over-recorded disbursement) ($900)
- Deduct: Service charge (($150))
- Adjusted cash balance = $37,850+$4,000+$900−$150=$42,600
Bank Reconciliation:
- Balance per bank: ($38,400)
- Add: Deposits in transit ($5,300)
- Deduct: Outstanding checks (X)
- Adjusted cash balance = ($42,600)
Solve for X:
$38,400+$5,300−X=$42,600
$43,700−X=$42,600
X=$43,700−$42,600=$1,100 - After completing its bank reconciliation, a company determined its adjusted cash balance to be ($25,000). The reconciliation included ($2,000) in deposits in transit, ($500) in outstanding checks, a ($100) bank service charge, and a ($1,200) note collected by the bank on the company's behalf. Which of the following adjusting journal entries is required?
Answer: Debit Cash ($1,100); Debit Bank Service Charge Expense ($100); Credit Notes Receivable ($1,200)
Adjusting journal entries are required only for items that reconcile the company's book balance to the correct cash balance. Deposits in transit and outstanding checks are timing differences related to the bank balance and do not require adjusting entries. The bank service charge and the note collected by the bank are book reconciling items. The note increases cash (Dr. Cash ($1,200)) and decreases notes receivable (Cr. Notes Receivable ($1,200)). The service charge decreases cash (Cr. Cash ($100)) and increases expenses (Dr. Bank Service Charge Expense ($100)). Combining these gives a net debit to Cash of ($1,100), a debit to Bank Service Charge Expense of ($100), and a credit to Notes Receivable of ($1,200).
- What adjusting entry should Atlantic make on September 30 to properly reflect the lockbox transactions for the month?
Answer: Debit Cash $2,300; Credit Accounts Receivable $2,800; Debit Accounts Receivable $500 to record net lockbox activity
When you encounter lockbox accounting questions, focus on timing differences between when the bank processes transactions and when the company records them. The key is identifying what transactions the company knows about versus what actually occurred at the bank.
Let's analyze the timing differences. The bank deposited $127,500, but Atlantic only recorded $124,200. This $3,300 difference consists of two components: $2,800 in checks deposited September 30 (but remittance advices not processed until October 2) and a $500 NSF check returned September 29 (but Atlantic wasn't notified until October).
For proper September 30 financial statements, Atlantic must record both events. The $2,800 represents legitimate customer payments that increased cash and reduced accounts receivable. The $500 NSF check means cash was actually reduced and the receivable should be reinstated. The net cash adjustment is $2,800 - $500 = $2,300 increase.
Answer A correctly captures both adjustments: Debit Cash $2,300 (net effect), Credit Accounts Receivable $2,800 (for customer payments), and Debit Accounts Receivable $500 (reinstating the NSF amount).
Answer B ignores the NSF check entirely, overstating cash by $500. Answer C treats the entire $3,300 variance as a cash increase, incorrectly assuming both components increase cash when the NSF check actually reduces it. Answer D only records the NSF check, missing the $2,800 in legitimate deposits that haven't been processed.
Remember: In lockbox questions, always reconcile both directions—what increased cash that you haven't recorded, and what reduced cash that you haven't recorded.
- Peridot Inc.'s bank reconciliation at December 31 shows a balance per books of ($14,000) and a balance per bank of ($16,500). Outstanding checks are ($3,000). There are no deposits in transit or bank errors. Which of the following single items could explain the remaining discrepancy and reconcile both balances to the same adjusted amount?
Answer: A bank service charge of ($500), not yet recorded by Peridot.
First, find the adjusted bank balance: ($16,500) (bank balance) - ($3,000) (outstanding checks) = ($13,500). This is the target correct cash balance. The unadjusted book balance is ($14,000). To reconcile the book balance to ($13,500), a deduction of ($500) is needed. A bank service charge of ($500) is a deduction from the book balance, which would make the adjusted book balance $14,000−$500=$13,500. This reconciles both sides.
- A (Note collected) would be added to books, resulting in an adjusted balance of ($14,500).
- C (Book error) means the book disbursement was overstated by ($500), so ($500) would be added back to books, resulting in an adjusted balance of ($14,500).
- D (Bank error) would be corrected on the bank side, not the book side. - The primary purpose of preparing a bank reconciliation is to:
Answer: account for the difference between the cash balance on the bank statement and the cash balance in the company's records, leading to the correct cash balance.
A bank reconciliation is an internal control procedure that explains the difference between the bank's record of cash and the company's record of cash. Its primary purpose is to identify timing differences, errors, and unrecorded transactions to arrive at the true, correct cash balance that should be reported on the balance sheet. While it helps identify errors (part of A) and provides information for budgets (part of B), its main goal is to reconcile the two balances to the correct ending balance. The other parts of A, B, and D are not primary purposes of the reconciliation process.
- While reconciling its bank account, Zircon Co. discovered that a deposit for ($1,890) was incorrectly recorded in the company's cash ledger as ($1,980). The bank statement shows the correct deposit amount. Which of the following is the correct adjustment on the bank reconciliation?
Answer: A deduction of ($90) from the balance per books.
The error was made by the company, so the adjustment must be made to the balance per books. The company recorded a cash receipt of ($1,980) when the actual receipt was ($1,890). This means the cash balance per books is overstated by $1,980−$1,890=$90. To correct this, ($90) must be deducted from the balance per books. Adjustments to the balance per bank are only for timing differences (like outstanding checks) or bank errors. - Turquoise Co. had checks outstanding totaling ($5,400) on its October bank reconciliation. In November, the bank statement showed that ($4,600) of these checks had cleared. The bank statement also showed that a check written by "Turkoise Inc." for ($300) was incorrectly charged to Turquoise Co.'s account. Furthermore, a check for ($700) from a customer was returned NSF. Which of these items will appear as a reconciling item on Turquoise Co.'s November bank reconciliation?
Answer: The remaining ($800) of October checks and the ($300) bank error.
A bank reconciliation explains the difference between the bank balance and the book balance. The reconciling items on the bank side are timing differences and bank errors. The ($800) of October checks that still haven't cleared ($5,400−$4,600) are still considered outstanding and will be a deduction on the bank side. The ($300) incorrect charge is a bank error that needs to be corrected (added back) on the bank side. The NSF check is a book-side reconciling item because the company's records need to be updated. - Obsidian Co. received its bank statement, which showed an ending balance of ($8,200). The company's unadjusted book balance was ($5,800). The reconciliation revealed ($2,500) in deposits in transit and ($1,200) in outstanding checks. Additionally, the bank collected a ($3,000) note on Obsidian's behalf and charged a ($300) NSF check from a customer. Based on this, what journal entry should Obsidian make?
Answer: Debit Cash ($2,700); Debit Accounts Receivable ($300); Credit Notes Receivable ($3,000)
Journal entries are only made for items affecting the book balance. The deposits in transit and outstanding checks affect the bank balance and require no entry. The book-side items are the note collected (increases cash, decreases notes receivable) and the NSF check (decreases cash, increases accounts receivable).
- Note collected: Debit Cash ($3,000), Credit Notes Receivable ($3,000).
- NSF check: Debit Accounts Receivable ($300), Credit Cash (($300)).
Combining these into a single compound entry: The net effect on cash is a debit of $3,000−$300=$2,700. The entry also requires a debit to Accounts Receivable for ($300) and a credit to Notes Receivable for ($3,000). Therefore, the correct entry is: Debit Cash ($2,700), Debit Accounts Receivable ($300), Credit Notes Receivable ($3,000). - Hartwell Company's bank reconciliation shows adjusted balances that differ by $350, with the adjusted bank balance being higher. The reconciliation correctly identified all outstanding checks ($2,100), deposits in transit ($1,750), and book adjustments ($480 net decrease to book balance). What is the most likely explanation for the remaining $350 difference?
Answer: A bank error, such as an incorrect charge or credit, that requires communication with the bank for resolution
When a bank reconciliation is prepared correctly and all normal reconciling items are identified, any remaining difference typically indicates an error by either the bank or the company. Since the problem states that outstanding checks, deposits in transit, and book adjustments were correctly identified, and there's still a $350 difference, this suggests a bank error. Choice A would be included in book adjustments. Choice B (additional deposit in transit) would make the difference larger, not resolve it. Choice C (additional outstanding check) would also increase the difference rather than explain the current variance.
- A company has $1,000 of outstanding checks at the beginning of the month. During the month, it issued $12,000 of new checks. The bank statement shows that $10,500 in checks cleared the bank during the month. There were no bank errors. What is the amount of outstanding checks at the end of the month?
Answer: $2,500
Outstanding checks represent checks written by the company but not yet cleared by the bank. To calculate the ending balance:
- Outstanding checks at beginning: $1,000
- Add: New checks issued during month: $12,000
- Total checks available to clear: $13,000
- Less: Checks that actually cleared: ($10,500)
- Outstanding checks at end: $2,500
Distractor A ($500) incorrectly ignores the beginning balance. Distractor B ($1,500) only considers new checks issued minus cleared checks. Distractor D ($3,500) represents a computational error in the reconciliation process.
- During the bank reconciliation process, Metro Industries discovered that the bank had erroneously charged their account $1,200 for another company's check. Additionally, Metro had recorded a $890 payment to a supplier as $980 in their cash disbursements journal. If Metro's book balance before adjustments was $12,340 and the adjusted bank balance is $15,750, what was the bank statement balance before considering any reconciling items?
Answer: $16,950
First, determine Metro's correct book balance: $12,340 + $90 (correction of recording error) = $12,430. Since the adjusted bank balance is $15,750, there must be $3,320 in timing differences (deposits in transit minus outstanding checks). The bank statement balance before adjustments was $15,750 + $1,200 (bank error to be corrected) = $16,950. Choice A incorrectly subtracts the bank error. Choice B fails to account for the full bank error amount. Choice D incorrectly includes the book recording error as affecting the bank statement balance.
- After completing the bank reconciliation and making all necessary adjusting entries, what will be the correct cash balance reported on Meridian's September 30 balance sheet?
Answer: $26,260
Start with the book balance of $25,150. Add note collection: $1,500 + $45 interest = $1,545. Subtract bank charges: $20 + $35 = $55. Subtract NSF check: $380. Adjusted book balance = $25,150 + $1,545 - $55 - $380 = $26,260. To verify: Bank balance $28,400 - outstanding checks $3,900 + deposit in transit $2,200 = $26,700. The difference represents reconciling items affecting only one side.
- At the end of the month, Topaz Corp.'s cash T-account has a balance of ($12,100). The bank statement has a balance of ($11,000). The reconciliation includes ($1,500) of deposits in transit, ($800) of outstanding checks, and an NSF check for ($400). What is the adjusted cash balance?
Answer: ($11,700)
The adjusted cash balance can be calculated from either the book side or the bank side. Both should yield the same result.
Book Side Reconciliation:
- Balance per books (T-account): ($12,100)
- Deduct: NSF check (($400))
- Adjusted cash balance = $12,100−$400=$11,700
Bank Side Reconciliation:
- Balance per bank statement: ($11,000)
- Add: Deposits in transit ($1,500)
- Deduct: Outstanding checks (($800))
- Adjusted cash balance = $11,000+$1,500−$800=$11,700
Both calculations result in an adjusted cash balance of ($11,700). - On its October 31 bank reconciliation, a company learns of an NSF check from a customer for ($450). The company had not been previously notified. On November 2, the customer visits the company and replaces the NSF check with cash. The company is preparing financial statements for the year ended October 31. How should the ($450) NSF check be treated on the October 31 financial statements?
Answer: An adjusting journal entry is required to debit Accounts Receivable and credit Cash for ($450) as of October 31.
Financial statements must reflect the company's financial position as of the balance sheet date, which is October 31. The subsequent collection of cash in November does not change the fact that on October 31, the original cash receipt was invalid. Therefore, the company must make an adjusting entry dated October 31 to decrease its cash balance and re-establish the accounts receivable from that customer. An NSF check is a reconciling item for the books (a deduction), not the bank. It reduces the book cash balance, it does not add to it.
- Phoenix Retail discovered during their bank reconciliation that they had recorded check #2847 for $1,290 in their cash disbursements journal, but the check was actually written for $1,920. The bank correctly charged their account $1,920. Additionally, they found that check #2851 for $2,150 was recorded correctly in their books but was charged by the bank as $2,510. What is the combined effect of these errors on the reconciliation process?
Answer: Book balance should be decreased by $990, and the bank should be notified of a $360 error requiring correction
For check #2847: Phoenix recorded $1,290 but actual amount was $1,920, so book balance must be decreased by $630. For check #2851: Phoenix correctly recorded $2,150 but bank charged $2,510, so bank made a $360 error that requires correction. Total book adjustment needed: decrease of $630. Bank error: $360 overcharge. Choice A incorrectly suggests adjusting bank balance in reconciliation rather than correcting the error. Choice B has the wrong direction for bank adjustment. Choice D incorrectly calculates the net effect and suggests adjusting rather than correcting the bank error.
