Problem 6-22A Effect of adjustments to cash on the accounting equation
After reconciling its bank account, Watson Company made the following adjusting entries:
| Entry No. | Account Titles | Debit | Credit |
|---|---|---|---|
| 1 | Cash | 20 | |
| Supplies Expense | 20 | ||
| To correct overstatement of expense | |||
| 2 | Cash | 845 | |
| Accounts Receivable | 845 | ||
| To record bank collection | |||
| 3 | Cash | 44 | |
| Interest Revenue | 44 | ||
| To record interest revenue | |||
| 4 | Service Charge Expense | 35 | |
| Cash | 35 | ||
| To record bank service charge | |||
| 5 | Accounts Receivable | 174 | |
| Cash | 174 | ||
| To record NSF check from Beat |
Required
Identify the event depicted in each journal entry as asset source (AS), asset use (AU), asset exchange (AE), or claims exchange (CE). Also explain how each entry affects the accounting equation by placing a + for increase, − for decrease, or NA for not affected under the following components of the accounting equation. The first event is recorded as an example.
| Event No. | Type of Event | Assets | = | Liabilities | + | Common Stock | + | Retained Earnings |
|---|---|---|---|---|---|---|---|---|
| 1 | AS | + | NA | NA | + |
Problem 6-23A Bank reconciliation and internal control
Following is a bank reconciliation for Zocar Enterprises for June 30, Year 1:
| Item | Cash | Bank |
|---|---|---|
| Balance as of 6/30/Year 1 | $1,918 | $3,000 |
| Deposit in transit | $600 | |
| Outstanding checks | $(1,507) | |
| Note collected by bank | $2,000 | |
| Bank service charge | $(25) | |
| NSF check | $(1,800) | |
| Adjusted cash balance as of 6/30/Year 1 | $2,093 | $2,093 |
When reviewing the bank reconciliation, Zocar’s auditor was unable to locate any reference to the NSF check on the bank statement. Furthermore, the clerk who reconciles the bank account and records the adjusting entries could not find the actual NSF check that should have been included in the bank statement. Finally, there was no specific reference in the accounts receivable supporting records identifying a party who had written a bad check.
Required
a. Prepare the adjusting entry that the clerk would have made to record the NSF check.
b. Assume that the clerk who prepares the bank reconciliation and records the adjusting entries also makes bank deposits. Explain how the clerk could use a fictitious NSF check to hide the theft of cash.
c. How could Zocar avoid the theft of cash that is concealed by the use of fictitious NSF checks?
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