- A company's bookkeeper mistakenly recorded a $500 check written to a supplier as a $500 cash receipt. The original incorrect entry was a debit to Cash and a credit to Accounts Payable. The correcting journal entry requires a:
Answer: Credit to Cash for $1,000.
The original incorrect entry was Dr. Cash $500, Cr. Accounts Payable $500. The correct entry should have been Dr. Accounts Payable $500, Cr. Cash $500. To correct the error, the original entry must be reversed (Dr. A/P $500, Cr. Cash $500) and the correct entry must be made (Dr. A/P $500, Cr. Cash $500). The combined correcting entry is Dr. Accounts Payable $1,000, Cr. Cash $1,000. Therefore, a credit to Cash for $1,000 is required.
- A company recorded a $1,600 cash sale in its journal. However, the bank statement shows the deposit was correctly made for $1,060, as the bookkeeper had transposed the last two digits. The journal entry to correct this error will:
Answer: Decrease total assets by $540.
The company's books overstated cash and sales revenue by $1,600−$1,060=$540. The correcting entry is a debit to Sales Revenue for $540 and a credit to Cash for $540. A credit to Cash decreases the Cash account, which is an asset. Since the corresponding debit is to a revenue account (which decreases equity), total assets will decrease by $540. - During December's bank reconciliation, Coastal Industries found that the bank had automatically transferred $5,000 from their checking account to a certificate of deposit, earning 4% annual interest. The bank also processed a pre-authorized payment of $750 for equipment maintenance and charged a $40 wire transfer fee for a transaction the company initiated. None of these items were recorded in the company's books. What is the appropriate journal entry to record these items?
Answer: Debit Short-term Investment $5,000; Debit Maintenance Expense $750; Debit Bank Service Expense $40; Credit Cash $5,790
The CD transfer should be recorded as a short-term investment (or similar asset account), maintenance is an expense, and wire transfer fee is a bank service expense. All reduce cash by the total amount. Choice A uses non-standard account names. Choice C incorrectly treats maintenance as prepaid. Choice D incorrectly calculates and records interest that hasn't been earned yet and uses wrong total amounts.
- What is the total credit to Cash needed to correct Northern Tech's books for all reconciling items?
Answer: $1,940
Credits to Cash (decreases) come from: NSF check $650, service charge $95, check printing charge $45, and correction of duplicate deposit recording $1,150. Total credits to Cash: $650 + $95 + $45 + $1,150 = $1,940. The EFT payment increases cash (debit). Choice A omits the duplicate deposit correction. Choice B omits the service charges. Choice D incorrectly includes the EFT payment as a credit instead of a debit.
- A company's bookkeeper is preparing adjusting entries based on the month-end bank reconciliation. The reconciliation included interest earned of $70, a customer's NSF check for $880, outstanding checks of $1,500, a deposit in transit of $2,000, and a bank service charge of $20. The compound journal entry to adjust the books will include:
Answer: A net credit to the Cash account for $830.
Journal entries are only required for items on the book side of the reconciliation. The interest earned increases cash (debit $70). The NSF check decreases cash (credit $880). The bank service charge decreases cash (credit $20). The outstanding checks and deposit in transit are bank-side items and do not require entries. The net effect on the Cash account is a credit of $880+$20−$70=$830. - Based on the bank reconciliation items identified, what should be the adjusted cash balance per books after all journal entries are recorded?
Answer: $30,650
When you encounter a bank reconciliation problem, remember that you need to adjust both the bank balance and the book balance separately, then make journal entries only for items that affect the company's books.
To find the adjusted cash balance per books, start with the book balance of $29,450 and adjust for items the company didn't know about until seeing the bank statement. The automatic loan payment of $1,200 reduces the book balance (the bank paid this on the company's behalf), while the collection of accounts receivable by the bank of $2,400 increases it (the bank collected money for the company).
The calculation is: $29,450 - $1,200 + $2,400 = $30,650.
Outstanding checks ($3,950), deposits in transit ($1,800), and the bank error ($600) don't affect the book balance adjustment because they represent timing differences or bank errors, not transactions the company needs to record.
Answer A ($31,250) incorrectly adds all positive reconciling items without considering which side they affect. Answer C ($30,050) likely results from incorrectly including some bank-side reconciling items in the book adjustment. Answer D ($29,850) appears to subtract items that should be added or fails to include all necessary book adjustments.
The correct answer is B ($30,650).
Study tip: Always separate bank reconciliation items into two categories: those requiring journal entries (affecting books) versus timing differences and bank errors (affecting bank side only). Only items requiring journal entries change your adjusted book balance.
- A bank reconciliation for Zenith Corp. revealed the following items not yet recorded on the company's books: interest earned of $50, an NSF check from a customer of $300, and an EFT from a customer paying their account balance of $1,200. What is the net effect of the required journal entries on Zenith Corp.'s cash balance?
Answer: An increase of $950
Each of these items requires a journal entry that affects the cash balance per books. Interest earned increases cash (+$50). The NSF check decreases cash (-$300). The EFT collection increases cash (+$1,200). The net effect is an increase of $50−$300+$1,200=$950. - A company receives notice from its bank that a customer's check for $900 has been returned NSF. The bank also charged the company a $30 fee for processing the returned check. The company's policy is to pass this fee on to the customer. The journal entry to record this event should include:
Answer: A debit to Accounts Receivable for $930.
The company needs to re-establish the receivable for the original amount of the check ($900) plus the bank fee that will be passed on to the customer ($30). Thus, Accounts Receivable should be debited for the total amount now owed by the customer, which is $930. The corresponding credit would be to Cash for $930 (to reverse the check and pay the bank fee). Expensing the fee is incorrect because it is being charged back to the customer.
- A company wrote check #123 for $870 to pay for the monthly utility bill. The bookkeeper erroneously recorded the check in the cash disbursements journal as $780. The check cleared the bank for the correct amount. Which journal entry is required to correct this error?
Answer: Debit Utilities Expense, $90; Credit Cash, $90.
The company's books understated both the cash payment and the utilities expense by $870−$780=$90. To correct this error, the company must increase Utilities Expense (a debit) and decrease Cash (a credit) by the amount of the error, $90. - A company's cash receipts journal shows a cash receipt of $4,231 from a customer on account. However, the deposit slip and the bank statement both show that $4,321 was correctly deposited. The journal entry to correct this transposition error would include a:
Answer: Debit to Cash for $90.
The company recorded less cash than it actually received by an amount of $4,321 - $4,231 = $90. The original entry understated both Cash (debit) and the reduction of Accounts Receivable (credit) by $90. To correct this error, Cash must be increased (debited) by $90, and Accounts Receivable must be further reduced (credited) by $90 to reflect the additional payment received.
- Western Industries discovered during their bank reconciliation that a check written to Supplier ABC for $1,240 was recorded in their cash disbursements journal as $1,420. The bank correctly processed the check for $1,240. Additionally, the bank statement showed an EFT collection from a customer for $3,200 that was not yet recorded. What journal entries are required?
Answer: Debit Cash $3,380; Credit Accounts Payable $180; Credit Accounts Receivable $3,200
The company overstated the check amount by $180 ($1,420 - $1,240), so cash should be increased by $180 with a corresponding decrease to Accounts Payable since less was actually paid. The EFT collection increases cash by $3,200 and reduces Accounts Receivable. These can be combined into one entry. Choice A incorrectly credits Sales instead of Accounts Receivable. Choice B uses an invalid account name and has unnecessary separate entries. Choice D incorrectly decreases cash for the recording error.
- When completing a bank reconciliation, which of the following items requires a journal entry on the company's books?
Answer: A bank debit memo for an NSF check from a customer.
Journal entries are required for items that the company was unaware of until receiving the bank statement. A bank debit memo for an NSF check represents a reduction in the company's cash that has not yet been recorded. Outstanding checks and deposits in transit are timing differences that have been recorded by the company but not yet by the bank; they do not require new entries. A bank error must be corrected by the bank.
- At month-end, a company's Cash account shows a balance of $12,500. The bank statement shows a balance of $13,850. The only reconciling items are outstanding checks of $2,000, a deposit in transit of $1,000, bank service charges of $50, and interest earned of $300. What is the total amount of the credit to Cash in the necessary adjusting journal entries?
Answer: $50
Journal entries are only made for items that adjust the company's book balance. In this case, those items are the bank service charges and the interest earned. The bank service charges require a credit to Cash for $50. The interest earned requires a debit to Cash for $300. The question asks for the total credit to Cash, which is solely from the service charges, amounting to $50. Outstanding checks and deposits in transit are bank-side adjustments and do not require entries.
- What is the net effect on Atlantic Services' Cash account after recording all necessary journal entries from the bank reconciliation?
Answer: Increase of $1,815
Only book reconciling items require journal entries: Note collection increases cash by $2,500, interest income increases cash by $150, loan payment decreases cash by $800, and bank charges decrease cash by $35. Net effect: $2,500 + $150 - $800 - $35 = $1,815 increase. Choice B omits the bank charges. Choice C has the wrong direction. Choice D omits the loan payment and bank charges. Deposits in transit and outstanding checks don't require journal entries as they're already recorded in the books.
- During the bank reconciliation process, Eastern Manufacturing identified that a customer's NSF check for $2,100 was returned by the bank, and the bank charged a $30 NSF fee. The original sale was made on credit terms of 2/10, n/30, and the customer had taken the discount when the check was initially received within the discount period. How should the NSF check and related fee be recorded?
Answer: Debit Accounts Receivable $2,057; Debit Sales Discount $43; Debit Bank Service Expense $30; Credit Cash $2,130
When an NSF check is returned, the full amount received ($2,100) must be removed from cash. Since the customer took a 2% discount, the original gross amount was $2,100 ÷ 0.98 = $2,143 (rounded). The discount taken was $43. The receivable is reinstated at the net amount actually owed ($2,057), the discount reversal is recorded separately ($43), and the NSF fee is expensed ($30). Total cash credit: $2,100 + $30 = $2,130.
- A company's bank statement shows an automatic payment of $1,500 to a lender. The loan agreement specifies that this payment consists of $1,200 for principal reduction and $300 for interest. The company had not previously recorded this payment. Which journal entry is required?
Answer: Debit Loan Payable, $1,200; Debit Interest Expense, $300; Credit Cash, $1,500.
The journal entry must reflect the components of the loan payment. The portion of the payment that reduces the loan balance is a debit to Loan Payable ($1,200). The portion that represents the cost of borrowing is a debit to Interest Expense ($300). The total cash paid out is a credit to Cash ($1,500).
- A bank reconciliation reveals a customer's check for $450 was returned for non-sufficient funds (NSF) and a monthly bank service charge of $30 was assessed. What is the total credit to the Cash account in the journal entry or entries required to adjust the books?
Answer: $480
Both the NSF check and the bank service charge decrease the company's cash balance and require adjusting entries. The NSF check requires a credit to Cash for $450 and a debit to Accounts Receivable. The bank service charge requires a credit to Cash for $30 and a debit to Bank Service Charge Expense. The total credit to Cash is the sum of these two amounts ($450+$30=$480). - A company's bank statement for the month shows the collection of a $5,000 note receivable, plus $200 of accrued interest. The bank charged a $25 collection fee. The company had not previously recorded the interest revenue. Which of the following journal entries is required to record this transaction?
Answer: Debit Cash for $5,175; Debit Bank Service Charge Expense for $25; Credit Notes Receivable for $5,000; Credit Interest Revenue for $200.
The journal entry must record the full amount of cash received, recognize the expense for the bank's fee, remove the note receivable from the books, and recognize the full amount of interest revenue earned. The cash received is the principal plus interest, less the fee ($5,000+$200−$25=$5,175). The collection fee is a separate expense and should not be netted against the interest revenue. - A company's bank statement shows an EFT collection from a customer, Mavis Corp., for $2,940. This amount was received net of a $60 bank processing fee. Mavis Corp. was settling a $3,000 invoice. Which journal entry correctly records this transaction?
Answer: Debit Cash $2,940; Debit Bank Service Charge Expense $60; Credit Accounts Receivable $3,000.
The entry must record the actual cash received ($2,940), recognize the processing fee as an expense ($60), and remove the full amount of the customer's invoice from Accounts Receivable ($3,000). The total debits ($2,940+$60) equal the total credit (($3,000)). Simply crediting Accounts Receivable for the net cash received would leave an incorrect balance in the customer's account. - A company's bank reconciliation process revealed the following: a note collected by the bank for $4,000 plus $100 interest; an NSF check from customer XYZ for $550; a bank service charge of $25; and interest earned on the bank account of $45. What is the net effect of the required journal entries on the Accounts Receivable account?
Answer: A debit of $550.
Of the items listed, only the NSF check affects the Accounts Receivable account. When a customer's check is returned as NSF, the company has not actually been paid. The journal entry reverses the initial cash receipt by crediting Cash and re-establishing the receivable by debiting Accounts Receivable for the amount of the check, $550. The other items affect Cash, Notes Receivable, Interest Revenue, and Expense accounts.
