Question

Pen Paint Company's unadjusted book balance at September 30 is $6,900. The Company's bank statement reveals bank service charges of $50. Two credit memos are included in the bank statement: one for $700 which represents a collection of an account receivable that the bank made for Pen Paint and one for $100 which represents the amount of interest that Pen Paint had earned on its interest-bearing checking account in June. Finally, a comparison of the Company's records with the bank statement revealed $500 of deposits in transit and $300 of outstanding checks. Based on this information, Pen Paint's true cash balance is

a. $7,850.
b. $7,650.
c. $7,700.
d. None of the answers is correct.

Answer 1

Pen Paint Company's true cash balance, after considering bank service charges, collections, interest earned, deposits in transit, and outstanding checks, is $7,850. The correct calculation involves adding and subtracting these values from the unadjusted book balance of $6,900. Option a. is correct.

Step-by-step explanation:

To find the true cash balance for Pen Paint Company, we need to adjust the unadjusted book balance according to the information obtained from the bank statement and the company's records. Pen Paint's unadjusted book balance is $6,900. Here's how you adjust this balance:

• Bank Service Charges: Subtract $50 from the book balance.
• Collections of Accounts Receivable: Add $700 that the bank collected.
• Interest Earned: Add $100 of interest earned on Pen Paint's account.
• Deposits in Transit: Add $500 to account for deposits that have not yet been processed by the bank.
• Outstanding Checks: Subtract $300 to account for checks written by Pen Paint that have not yet been processed by the bank.

Let's perform the calculations:

$6,900 (unadjusted book balance) - $50 (bank service charges) + $700 (accounts receivable collection) + $100 (interest earned) + $500 (deposits in transit) - $300 (outstanding checks) = $7,850.

The true cash balance for the Pen Paint Company is hence $7,850. Therefore, the correct answer is (a) $7,850.