Question

As of June 30, 2016, the bank statement showed an ending balance of $19,500. The unadjusted cash account balance was $15,200. The following information is available:

1. Deposit in Transit. $2,400.
2. Credit memo in bank statement for interest earned in June. $30.
3. Outstanding check $6,690.
4. Debit memo for service charge. $20.
a. Determine the true cash balance by preparing a bank reconciliation as of June 30, 2016 using the preceding information.
b. Record in general journal format the adjusting entries necessary to correct the unadjusted book balance.

Answer 1

To determine the true cash balance, we make adjustments for the deposit in transit, credit memo for interest earned, outstanding check, and debit memo for service charge. The true cash balance is $10,920. The adjusting entries necessary to correct the unadjusted book balance would be to add the deposit in transit and credit memo while deducting the outstanding check and debit memo.

Step-by-step explanation:

To determine the true cash balance by preparing a bank reconciliation, we need to adjust the unadjusted cash account balance for items that have not been recorded in the bank statement or the company's books.

a. To find the true cash balance, we make the following adjustments:

• Add the deposit in transit ($2,400) to the unadjusted cash account balance: $15,200 + $2,400 = $17,600.
• Add the credit memo for interest earned in June ($30) to the unadjusted cash account balance: $17,600 + $30 = $17,630.
• Deduct the outstanding check ($6,690) from the unadjusted cash account balance: $17,630 - $6,690 = $10,940.
• Deduct the debit memo for service charge ($20) from the unadjusted cash account balance: $10,940 - $20 = $10,920.

Therefore, the true cash balance is $10,920.

b. The adjusting entries necessary to correct the unadjusted book balance would be:

• Add the deposit in transit ($2,400) to the book balance.
• Add the credit memo for interest earned in June ($30) to the book balance.
• Deduct the outstanding check ($6,690) from the book balance.
• Deduct the debit memo for service charge ($20) from the book balance.

Answer 2

To determine the true cash balance, a bank reconciliation is prepared. The true cash balance is calculated by adjusting the unadjusted cash account balance for items like deposits in transit, outstanding checks, credit memos, and service charges. Adjusting entries are then recorded to correct the unadjusted book balance.

Step-by-step explanation:

a. Bank Reconciliation

To determine the true cash balance, we need to prepare a bank reconciliation. Here are the steps:

1. Start with the unadjusted cash account balance of $15,200.
2. Add the deposit in transit of $2,400. This represents a deposit that the company made, but it has not yet been recorded by the bank.
3. Subtract the outstanding check of $6,690. This represents a check that the company issued, but it has not yet been cashed by the recipient.
4. Add the credit memo of $30. This represents interest earned that was recorded by the bank, but not yet recorded by the company.
5. Subtract the service charge of $20. This represents a fee charged by the bank for services.

The true cash balance is calculated as follows: $15,200 + $2,400 - $6,690 + $30 - $20 = $10,920.
True Cash Balance: $10,920

b. Adjusting Entries

To correct the unadjusted book balance, we need to record adjusting entries. Here are the entries:

1. To record the deposit in transit: Debit Cash, Credit Deposits in Transit for $2,400.
2. To record the credit memo: Debit Interest Income, Credit Cash for $30.
3. To record the outstanding check: Debit Accounts Payable, Credit Cash for $6,690.
4. To record the service charge: Debit Service Charge Expense, Credit Cash for $20.

These adjusting entries will bring the unadjusted book balance in line with the true cash balance.