Bank Reconciliation

A. LESSON PREVIEW/REVIEW
Multiple Choice:
1. All of the following may be included under the heading of "cash" except
a. currency.
b. money market funds.
c. checking account balance.
d. savings account balance
2. In which accounts are post-dated checks received classified?
a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.
3. In which account are postage stamps classified?
a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.

Skill-building Activities
Part I. True or False. Write TRUE if the statement is correct; Otherwise, write FALSE.
TRUE 1. Short-term, highly liquid investments may be included with cash on the balance sheet.
FALSE 2. All claims held against customers and others for money, goods, or services are reported as
current assets.
TRUE 3. Checks drawn which are post-dated should be reverted back to cash even if the checks are
already delivered to payees.
FALSE 4. A compensation balance that is legally restricted as to withdrawal can be included as part of cash
and cash equivalents.
FALSE 5. A bank overdraft should always be offset from another bank account with a positive balance.

Part II. Multiple Choice.

1. Which of the following is not considered cash for financial reporting purposes?
a. Petty cash funds and change funds
b. Money orders, certified checks, and personal checks
c. Coin, currency, and available funds
d. Postdated checks and I.O.U.'s

2. Which of the following is considered cash?

a. Certificates of deposit (CDs)
b. Money market checking accounts
c. Money market savings certificates
d. Post-dated checks

3. Travel advances should be reported as

a. supplies
b. cash because they represent the equivalent of money.
c. investments
d. none of these

4. Which of the following items should not be included in the Cash caption on the balance sheet?
a. Coins and currency in the cash register
b. Checks from other parties presently in the cash register
c. Amounts on deposit in checking account at the bank
d. Postage stamps on hand

5. All of the following may be included under the heading of "cash" except
a. currency
b. money market funds
c. checking account balance
d. savings account balance

6. In which accounts are post-dated checks received classified?

a. Receivables.
b. Prepaid expenses.
c. Cash.
d. Payables.

7. In which account are postage stamps classified?

a. Cash.
b. Office supplies.
c. Receivables.
d. Inventory.

8. What is a compensating balance?

a. Savings account balances.
b. Margin accounts held with brokers.
c. Temporary investments serving as collateral for outstanding loans.
d. Minimum deposits required to be maintained in connection with a borrowing arrangement.

9. Under which section of the balance sheet is "cash restricted for plant expansion" reported?
a. Current assets
b. Non-current assets
c. Current liabilities
d. Stockholders' equity

10. A cash equivalent is a short-term, highly liquid investment that is readily convertible into known
amounts of cash and
a. is acceptable as a means to pay current liabilities
b. has a current market value that is greater than its original cost
c. bears an interest rate that is at least equal to the prime rate of interest at the date of liquidation
d. is so near its maturity that it presents insignificant risk of changes in interest rates

11. Bank overdrafts, if material, should be

a. reported as a deduction from the current asset section
b. reported as a deduction from cash
c. netted against cash and a net cash amount reported
d. reported as a current liability

12. Deposits held as compensating balances

a. usually do not earn interest
b. if legally restricted and held against short-term credit may be included as cash
c. if legally restricted and held against long-term credit may be included among current assets
d. none of these

13. What is the proper accounting treatment for a stale check?

a. Revert back to cash and accounts payable.
b. Revert back to cash and a credit to gain.
c. Ignored
d. Either a or b

14. Which one of the following statements is incorrect?

a. The accounting function should be separated from the custodianship of a company’s assets.
b. Certain clerical personnel in a company should be rotated among various jobs.
c. The responsibility for receiving merchandise and paying for it should usually be given to one person.
d. A company’s personnel should be given well-defined responsibilities.

15. Karen Company provided the following information on December 31, 2016:
Cash on hand P500,000
Petty cash fund 20,000
Security bank current account 3,000,000
BDO current account No.1 400,000
BDO current account No. 2 (50,000)
BSP treasury bill - 60 days 4,000,000
BPI time deposit - 30 days 1,000,000

The cash on hand included a customer post-dated check of P100,000 and postal money order of
P40,000. A check for P300,000 was drawn against the Security Bank account, dated January 15,
2017, delivered to the payee and recorded December 31, 2016. The BPI time deposit is set aside
for acquisition of equipment. What total amount of cash and cash equivalents should be reported on
December 31, 2016?

a. P7,470,000
b. P7,770,000
c. P8,070,000
d. P9,070,000

Check for Understanding

PART 1.
1. In preparing its bank reconciliation for the month of December 2018, Promotion Company has the
following information:
Balance per bank statement, December 31 P 396,550
Deposit in transit, December 31 68,750
Outstanding checks, December 31 63,250
Promotion’s account erroneously credited by bank on
December 19 2,750
Bank service charges for December 550

What should be the balance of cash on December 31?

A. P387,750 C. P399,300
B. P398,750 D. P402,050

2. Entity A is preparing its February 28, 20x1 bank reconciliation statement. The following information was
determined:
Cash balance per accounting books, Feb. 28, 20x1 ₱260,000
Cash balance per bank statement, Feb. 28, 20x1 ₱205,000

When investigating the difference, the accountant determined the following:

 A customer deposited ₱30,000 to Entity A’s bank account as payment for an account receivable.
This
is not yet recorded in the books of accounts.
 A ₱102,500 check deposited by Entity A during the month is not yet credited to Entity A’s
account.
 A check drawn in the amount of ₱22,500 is not yet presented to the bank for payment.
 The bank returned a check deposit amounting to ₱5,000 because of insufficiency in the funds of
the drawer. The check was received from a customer as payment for accounts receivable.

How much is the adjusted bank balance?

A. 582,000 B. 280,000 C. 852,000 D. 285,000

3. Assume the following facts for Lay Co: The month-end bank statement shows a balance of 40,000;
outstanding checks total 2,000; a deposit in transit of 8,000; and a check of 400 was erroneously charged
against the account by the bank. What is the correct cash balance at the end of the month?
A. 33, 600 B. 34,400 C. 45,600 D. 46,400

4. The following data are gathered from the records of Stephen Company for the month of Dec. 2017.
 Balance per book 500,000
Balance per bank 445,000
Deposit in transit 300,000
Outstanding check 85,000
Bank service charge for the month of December 5,000
Customer’s check returned by bank marked “NSF” 50,000
Customer’s note collected by bank face: 200,000
Interest 20,000; collection fee 5,000 215,000

How much is the adjusted cash balance? ₱660,000

Bal. per books, end. ₱500,000 Bal. per bank, end. ₱445,000
Add: CM 215,000 Add: DIT 300,000
Less: DM (5,000) Less: OC (85,000)
(50,000)
Add/Less: Book errors Add/Less: Bank errors -
Adjusted balance ₱660,000 Adjusted balance ₱660,000

5. Globe Co. provided the following data for the purpose of reconciling the cash balance per book with the
balance per bank statement on December 31, 2017

Balance per bank statement 200,000

Balance per book 85,000
Outstanding checks (including certified check of P10,000) 50,000
Deposit in transit 20,000
December NSF checks (of which P5,000 had been redeposited
and cleared by December 27) 15,000
Erroneous credit to Globe’s account, representing proceeds of
granted to another company 30,000
Proceeds of note collected by bank for Globe, net of service charge of 2,000 75,000

The cash in bank to be reported is at 150,000

PART II. Prepare the requirements being asked for each problem:

Problem 1

Data concerning the cash records of Arones Company for the months of November and December 20x1 are
shown below:

November 30 December 31
Book balance 11,200 ?
Book debits 63,800
Book credits 56,400
Bank balance 30,000 40,800
Bank debits ?
Bank credits 54,600
Notes collected by bank 4,500 6,000
Bank service charge 40 200
NSF checks 1,760 2,800
Overstatement of check in payment
of salaries 3,800 2,400
Deposit in transit 12,000 22,500
Outstanding checks 19,500 35,700
Deposit of 123 Corporation erroneously
credited to ABC Co.’s account 4,800 3,600

Requirement:
 Prepare the proof of cash.

Per books:
Nov. 30 Receipts Disbursement Dec. 31
Bal. per books 11,200 63,800 56,400 18,600
Note collected by
bank:
November 4,500 (4,500)
December 6,000 6,000
Bank service charges
November (40) (40)
December 200 200
NSF checks
November (1,760) (1,760)
December 2,800 (2,800)
Book errors
November 3,800 (3,800)
December (2,400) 2,400
Adjusted balances 17,700 61,500 55,200 24,000

Per banks:
Nov. 30 Receipts Disbursement Dec. 31
Bal. per books 30,000 56,400 43,800 40,800
Deposit in Transit
November 12,000 (12,000)
December 22,500 22,500
Outstanding checks
November (19,500) (19,500)
December 35,700 35,700
Bank errors
 November (4,800) (4,800)
December (3,600) (3,600)
Adjusted balances 17,700 61,500 55,200 24,000

Problem 2

Entity A is preparing its February 28, 20x1 bank reconciliation statement. The following information was
determined:
Cash balance per accounting books, Feb. 28, 20x1 ₱260,000
Cash balance per bank statement, Feb. 28, 20x1 ₱205,000

When investigating the difference, the accountant determined the following:

1. A customer deposited ₱30,000 to Entity A’s bank account as payment for an account receivable.
This is not yet recorded in the books of accounts.
2. A ₱102,500 check deposited by Entity A during the month is not yet credited to Entity A’s account.
3. A check drawn in the amount of ₱22,500 is not yet presented to the bank for payment.
4. The bank returned a check deposit amounting to ₱5,000 because of insufficiency in the funds of the
drawer. The check was received from a customer as payment for accounts receivable.

Requirements:
 Prepare the bank reconciliation.

Bal. per books, end. ₱260,000 Bal. per bank, end. ₱205,000
Add: CM 30,000 Add: DIT 102,500
Less: DM (5,000) Less: OC (22,500)
Add/Less: Book errors Add/Less: Bank errors -
Adjusted balance ₱285,000 Adjusted balance ₱285,000

 Prepare the adjusting (reconciling) entries.

AJE (3) Cash 30,000
Accounts Receivable 30,000
To record the collection of accounts receivable
AJE (4) Accounts receivable 5,000
Cash 5,000
to revert the NSF check back to accounts receivable