Question

PART I

You are auditing cash in bank for Pandemic Supply Corp. for the fiscal year ended March 31. The client has not prepared the March 31 bank reconciliation. After the brief discussion with the owner, you agree to prepare the reconciliation with assistance from one of Pandemic Supply’s clerk. You have obtained the following information:

	General Ledger	Bank Statement
Beginning balances	#36,500	$ 41,050
Deposits		17,800
Cash receipts journal	22,450
Cheques cleared by bank		(23,688)
Cash disbursements journal	(43,738)
March bank service charge		(150)
Note paid directly by bank		(11,470)
NSF cheque not honored by bank		(912)
Ending balances	$15,212	$22,630
	Feb. 29 Bank Reconciliation: Information in General Ledger and Bank Statement
Balance per bank		$ 41,050
Deposits in transit		400
Outstanding cheques		4,950
Balance per books		36,500

In addition, the following information is obtained:

1. Cheques clearing that were outstanding on February 29 totaled $ 4,950
2. Cheques clearing that were recorded in the March disbursement journal totaled $18,738
3. A cheque for $1,500 cleared the bank but had not been recorded in the cash disbursements journal. It was for an acquisition of inventory. Pandemic Supply uses the periodic inventory method
4. A Cheque for $1,100 was charged to Pandemic Supply but had been written on an associated company’s bank account
5. Deposits included $400 from February and $17,400 for March
6. The bank withdrew from Pandemic Supply’s account a nonsufficient funds (NDF) customer cheque totalling $912. The credit manager concluded that the customer intentionally closed its account and that the owner had left the city. The account was turned over to a collection agency
7. The Bank deducted $11,100 plus interest from Pandemic Supply’s account for a loan made by the bank under an agreement signed four months ago. The note payable was recorded at $11,100 on Pandemic Supply’s books.

Required

1. Prepare a bank reconciliation that shows both the (1) unadjusted and adjusted balances per the general ledger and (2) unadjusted and adjusted balance per bank
2. Identify the nature of adjustment requirement.

Answer 1

SOLUTION

a. Bank reconciliation:
Balance per bank	$ 22630
Add:
	Deposits in transit (1)	5050
	Cheque erroneously charged to Trail Supply Corp.	1100
	Total		28780
Less: outstanding cheques (2)	(27600)
	Adjusted Bank balance	$1180
Balance per books before adjustments	$15212
Adjustments to books:
	July bank service charge	(150)
	Note payment (11100 principal, 370 interest)	(11470)
	NSF cheque	(912)
	Unrecorded cheque	(1500)
	Balance per books after adjustments	$1180
(1)	2/28 DIT	$400
	march deposits per books	22450
	march deposits per bank	(17800)
	3/31 DIT	$5050
(2)	2/28 O/S cheques	$4950
	march cheques per books	43738
	march cheques cleared	(23688)
	Erroneous cheque charged	1100
	Unrecorded cheque	1500
	march/31 O/S cheques	$27600

b.

Adjusting entry:	DR
(CR)
Bank service charges	$87
Interest expense	300
Note payable	5,800
Allowance for doubtful accounts	311
Purchases	1,060*
Cash in bank	(7,558)
	0

c.
Reconciling Item	Audit Procedure
1.	Deposits in transit	Trace to duplicate deposit slip and entry on cutoff bank statement.
2.	Erroneous cheque	Examine correction notice in August charge received from bank.
3.	Outstanding cheques	Obtain cutoff bank statement. Trace enclosed cheques to outstanding
		cheque list. Trace uncleared items to supporting documentation.
4.	Bank service charge	Examine advice returned with July bank statement.
5.	Note payment	Examine cancelled note. Recompute interest. Check for absence of
		note on 7/31 bank confirmation.
6.	NSF cheque	Examine advice returned with July bank statement. Examine other
		related evidence from credit manager to determine if account is
		uncollectible.
7.	Unrecorded cheque	Examine cheque returned with July bank statement. Trace number to
		absence in July cash disbursements journal and recording in August.
		Examine supporting documentation. Investigate why unrecorded.