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Chapter 7: Q10SE (page 414)

Recording transactions from a bank reconciliation Review your results from preparing Guard Dog Security Systems’ bank reconciliation in Short Exercise S7-9. Journalize the company’s transactions that arise from the bank reconciliation. Include an explanation with each entry.

Short Answer

Expert verified

The Cash account was debited with $510.

Step by step solution

01

Step-by-Step SolutionStep 1: Definition of accounts receivable

Accounts receivable is the amount that is earned but not received.

02

Journal entries

Date

Particulars

Debit

Credit

December 31

Cash

$510

Accounts Receivable

$510

(Being entry for the accounts receivable collected by the bank)

December 31

Cash

$20

Interest Revenue

$20

(Being entry of interest revenue received on bank balance)

December 31

Bank Expense

$30

Cash

$30

(Being entry for the service charge expense)

The first entry is passed on by recording the amount of the accounts receivable that the bank collects. Hence, the cash account is debited, and the accounts receivable account is credited.

The second entry is passed on by recording the interest revenue earned from the bank balance.

The third entry is passed to the service charge that the bank deducts from the bank account.

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Most popular questions from this chapter

Question: What is the difference between an internal auditor and an external auditor?

Preparing a bank reconciliation

The Cash account of Guard Dog Security Systems reported a balance of \(2,540 at December 31, 2018. There were outstanding checks totaling \)400 and a December 31 deposit in transit of \(100. The bank statement, which came from Park Cities Bank, listed the December 31 balance of \)3,340. Included in the bank balance was a collection of \(510 on account from Brendan Ballou, a Guard Dog customer who pays the bank directly. The bank statement also shows a \)30 service charge and $20 of interest revenue that Guard Dog earned on its bank balance. Prepare Guard Dog’s bank reconciliation for December 31.

Defining internal control

Internal controls are designed to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate accounting records.

Requirements

1. Which objective do you think is most important?

2. Which objective do you think the internal controls must accomplish for the business to survive? Give your reason.

Understanding the Sarbanes-Oxley Act and identifying internal control strengths and weaknesses. The following situations suggest a strength or a weakness in internal control.

a. Top managers delegate all internal control procedures to the accounting department.

b. Accounting department staff (or the bookkeeper) orders merchandise and approves invoices for payment.

c. Cash received over the counter is controlled by the sales clerk, who rings up the sale and places the cash in the register. The sales clerk matches the total recorded by the register to each day’s cash sales.

d. The employee who signs checks need not examine the payment packet because he is confident the amounts are correct.

Requirements

1. Define internalcontrol.

2. The system of internal control must be tested by external auditors. What law or rule requires this testing?

3. Identify each item in the list above as either a strength or a weakness in internal control, and give your reason for each answer.

In 100 words or fewer, explain why there may be a difference between the bank statement ending cash balance and the ending balance in the Cash account. Give at least two examples of adjustments to the bank balance and the book balance.
See all solutions

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