FAR MC QUESTION

  • Creator
    Topic
  • #192183
    cpa1988
    Participant

    I don’t think this is even worth asking but it is irking me so can someone please offer some insight into the following:

    At June 30, Almond Co.’s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond’s general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50. What was Almond’s adjusted cash balance at June 30?

    a. $10,462

    b. $10,048

    c. $9,598

    d. $9,961

    Explanation

    Choice “b” is correct. Almond’s adjusted cash balance is computed as follows:

    Adjusted cash balance = Unadjusted cash balance +/- bank errors + credit memos – service charges

    Adjusted cash balance = $10,012 – ($95 – $59) + $35 – $50 = $9,961

    My question is WHY do you subtract the $36 for the check that was recorded incorrectly? What is the objective here? To get to correct balance per books? Wouldn’t you want to add the $36? What is this?

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  • #648021
    excel monkey
    Participant

    The basics of it are that you took 95 dollars out of your account, but wrote down that you only took 59 dollars out. To correct the mistake, you need to subtract the additional 36 dollars from the balance in the cash account. Someone else had this same question the other day in the FAR Study Group. Below was my answer to them:

    When the check was originally recorded the journal entry was:

    dr. Some Account……………………………….59

    cr. Cash…………………………………………………59

    The correcting entry would require an additional $36 credit to cash to get to the correct amount that should have been recorded in the first transaction ($95).

    dr. Some Account……………………………….36

    cr. Cash………………………………………………..36

    Therefore, you should subtract $36 from the Cash balance reported in the general ledger.

    FAR - 91
    AUD - 88
    BEC - 86
    REG - 79

    #1306143
    forevercpa
    Participant

    Great explanation @excel monkey. I was struggling with this same question and your explanation clarified it.

    Thanks a lot!

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