MASTERING CORRECTION OF ACCOUNTING ERRORS LESSON 1

SOLUTIONS TO HOMEWORK EXERCISES

Section 1–WHERE ERRORS OCCUR AND HOW THEY ARE FOUND

1. Match the following errors on the left with the type of error on the right.

_h_ 1. A cash sale for $700 was recorded as $7,000. a. Omission

_f_ 2. Annual depreciation was calculated using a useful b. Accrual or deferral error
life of 8 years instead of 6 years.
c. Classification error
_ a _ 3. A purchase of supplies was never booked.
_ g _ 4. A $740 customer check was recorded as $470. d. Arithmetic mistake
_ c _ 5. Payment for an ad was debited to Utilities e. Use of incorrect
Expense. accounting principle
_ a _ 6. At year end, no adjusting entry was recorded for f. Use of improper
annual depreciation expense. accounting estimate
_ b _ 7. On March 1, a $1,200 check to pay the premium g. Transposition error
for a 24-month policy was debited to Prepaid
Insurance. On December 31, the adjusting entry h. Slide error
recognized insurance expense of $450. i. Posting error

2. Match the following errors on the left with the type of error on the right.

_ h _ 1. A $7,000 equipment purchase booked at $700. a. Omission

_ c _ 2. A $1,000 equipment purchase debited to b. Accrual or deferral error
Supplies.
c. Classification error
_ d _ 3. Four cash accounts with balances of $1,000,
d. Arithmetic mistake
$4,200, $3,100 and $1,800 are totaled and
entered as $10,000. e. Use of incorrect accounting
principle
_ f _ 4. GrowCo, which normally takes 2% of accounts
receivable as bad debt, takes 3% this year. f. Use of improper accounting
estimate
_ b _ 5. On Oct. 1, a firm receives $1,200 for 12 months’
rent and credits Rent Revenue. The year-end g. Transposition error
adjusting entry debits Rent Revenue and credits h. Slide error
Rent Received In Advance for $300.
i. Posting error
Section 2-THE BANK RECONCILIATION

1. Indicate for each of the following whether you must adjust the bank balance (“Bank”) or ledger Cash
account (“Ledger Cash”) in your monthly reconciliation.
a. A debit memo
Book
b. A deposit in transit
Bank
c. A bank service charge
Book
d. A credit memo
Book
e. An NSF check
Book
f. An outstanding check
Bank
g. Unrecorded interest
Book
h. Collection by the bank of a note receivable from a customer with accrued interest
Book
2. Below are items for October 200X that you are seeing for the first time.
a. Indicate with a check mark whether each item should be added to or subtracted from the bank
balance, book balance, or neither (i.e., it does not affect the bank reconciliation).

Bank balance Book balance Not

Add Deduct Add Deduct used
a. Interest earned on bank cash balance X
b. Bank service charge X
c. NSF check from a customer
X
d. A night deposit made on October 31
when the bank was closed X
e. Checks written and mailed October 31 X
f. An October 12 deposit appearing on the
bank statement as made on October 13 X
g. Another firm’s check charged to yours X
h. Payment of a phone bill that appears on
the bank statement but was never
recorded X
i. Collection of principal and interest on a
customer’s note collected by the bank X

b. Prepare the journal entries to conform the ledger Cash account balance with the reconciled
bank balance as of October 31.

a. Cash XXX
Interest Income XXX
To record bank interest

b. Miscellaneous Expense XXX

Cash XXX
To record bank service charge

c. Accounts Receivable XXX

Cash XXX
To record NSF check returned by bank

h. Utilities Expense XXX

Cash XXX
To record utility expense

i Cash XXX
Note Receivable XXX
Interest Income XXX
To record N/R and interest collected by bank
3. Fiori publishes ratings and reviews of hotels and restaurants for traveling salespeople. As of June
31, Fiori’s ledger Cash balance is $31,466. The June bank statement balance is $70,616, and
includes the following items.
• Bank service charge for June, $50
• NSF check returned with June bank statement, $2,300
• Note collected for your company by the bank in June, $25,000
• Interest on note collected by the bank in June, $2,500
• Outstanding checks as of the end of June, $21,000
• Deposit in transit at the end of June, $7,000
a. Prepare Fiori’s June bank reconciliation.

Fiori International Bank Reconciliation for June 30

Balance per bank, June 30 $ 70,616
Add: June 30 deposit in transit 7,000
$ 77,616
Deduct: Outstanding checks 21,000
Corrected cash balance, June 30 $ 56,616

Balance per books, June 30 $ 31,466

Add: Note receivable collected by bank 25,000
Interest collected by bank on note receivable 2,500
$ 58,966
Deduct: NSF check 2,300
Bank service charge 50
Corrected cash balance, June 30 $ 56,616

b. Prepare the journal entries to conform Fiori’s ledger Cash account balance with the
reconciled bank balance as of June 30.
Cash 25,000
Notes Receivable 25,000
To record collection of N/R by bank
Cash 2,500
Interest Income 2,500
To record interest on note N/R by bank
Accounts Receivable 2,300
Cash 2,300
To record NSF check returned by the bank
Miscellaneous Expense 50
Cash 50
To record bank service charge
4. On July 31, Reed Co’s ledger Cash account balance is $25,110, its bank statement balance,
$27,620. Use the data below to reconcile the two balances as of July 31, 20X9:
• Checks outstanding of $6,300
• Check #244, to pay the June gas bill was correctly written for $270, but recorded on Reed’s
books as $720
• $60 for a safe-deposit box—but Reed does not rent one
• A debit memorandum for $200 for a $175 NSF check and $25 bank NSF fee.
• A $40 debit memorandum for bank service Reed is seeing for the first time
• A July 31 night deposit of that day’s cash receipts of $3,940 that is not on the bank statement
a. Prepare Reed Co’s bank reconciliation for July 31, 20X9.

Reed Co. Bank Reconciliation for July 31

Balance per bank statement, July 31 $ 27,620
Add: July 31 deposit in transit 3,940
Erroneous safe deposit box charge 60
$ 31,620
Deduct: Outstanding checks 6,300
Corrected cash balance, July 31 $ 25,320

Balance per books, July 31 $ 25,110

Add: Error in recording check No. 244 450
$ 25,560
Deduct: NSF check 175
NSF fee 25
Bank service charge 40
Corrected cash balance, July 31 $ 25,320

b. Prepare the journal entries required to conform the company’s book balance with the
reconciled bank balance as of July 31, 20X9.
Cash 450
Utilities Expense 450
To correct utilities expense book error
Accounts Receivable 175
Miscellaneous Expense 25
Cash 200
To record NSF check and service charge
Miscellaneous Expense 40
Cash 40
To record bank service charge