[SoCalCPA]

For the following question, I don’t really understand the lay out of the question. I understand the concept of bank recs, disbursements, deposits, etc, though. Thanks in advance!

Q) Which of the following cash transfers results in a misstatement of cash at Dec 31, 2007?

A)

Disbursement recorded in books – 1/5/08

Deposit received in books – 12/31/07

Paid by Bank – 12/31/07

Recorded received by bank – 1/4/08

The following are okay.

Disbursement recorded in books – 1/1/08

Deposit received in books – 1/1/08

Paid by Bank – 12/31/07

Recorded received by bank – 12/31/07

Disbursement recorded in books – 1/4/08

Deposit received in books – 1/7/08

Paid by Bank – 1/4/08

Recorded received by bank – 1/4/08

– Is there an order of process here? So deposit received in books is 12/31/07, but disbursement recorded in books is 1/5/08. So what is we received in year 7, but we recorded the money out in year 8? I don’t understand what is going on here haha. Thanks again!

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[whatkey]

Cash would be understated at 12/31 because they didn't record the disbursement prior to year end. With questions like this you are looking for cutoff errors; specifically transactions that OCCURRED BEFORE year end that were RECORDED AFTER year end. Also I think you are distracted by the word “deposit.” All of the transactions are disbursements.

Using Becker, Ninja Notes, and CpaReviewForFree

FAR - 87 (2/17)
REG - 89 (4/21)
AUD - 89 (5/31)
BEC - 89 (7/11)

[Anonymous]

Cash is overstated at 12/31/07. Look at it from a reconciliation perspective.

If there were no other entries in these two accounts and you had the following information:

Beginning balance in Cash #1 at 12/1/07 is 10,000

Beginning balance in Cash #2 at 12/1/07 is 10,000

Record the deposit of $5,000 in Cash #2 at 12/31/07

Total Ending Cash at 12/31/07 looks like $25,000 (Cash #1 10,000 and Cash #2 15,000)

Then record the disbursement from Cash #1 on 1/4/08 (5,000)

Total Ending Cash at 1/4/08 is correct at $20,000 (Cash #1 5,000 and Cash #2 15,000)

Cash is correct at 1/4/08 but overstated at 12/31/07

You should actually have a Deposit in Transit in Cash #2 and an outstanding check in Cash #1 at 12/31/07.

[whatkey]

Kricket is right.

I meant “Cash would be *Overstated* at 12/31” not understated

Using Becker, Ninja Notes, and CpaReviewForFree

FAR - 87 (2/17)
REG - 89 (4/21)
AUD - 89 (5/31)
BEC - 89 (7/11)

[Anonymous]

Hi

If I may hijack the thread. I saw this same question and understood it as explained however, how if at all does the actual timing of the actual bank transactions matter or is it all about the book entries (my assumption)?

Thanks!

[SoCalCPA]

Thanks for the explanations, but unfortunately something is still not clicking. I see that if the receipt date per books is Year 1,but disbursement date per books is year 2, then cash will be overstated in year 1 (hopefully this is right lol). But this is purely from memorization, and I don't see why.

Does receipt date = the date in which cash is received, and disbursement date = the date in which cash is sent out? My question is, why does it matter that we receive the cash in year 1, but we transfer out the cash in year 2? Am I suppose to assume that cash received in year 1 should be transferred out in year 1 or whatever reason? Also, does date per bank not matter at all?

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[Anonymous]

I know this is going to look like a really long post so just hang with me.

Checking Account #1

12/01/2007 Beginning Balance = $10,000

Assuming no other checks or deposits were posted to this account and since you didn't record the check that you wrote out of this account and deposited into another account then the balance at 12/31/2007 = $10,000

Checking Account #2

12/01/2007 Beginning Balance = $10,000

You deposited a check for $5,000 into Checking Account #2 on 12/31/07

Assuming there were no other checks or deposits into this account then your reconciled balance on 12/31/2007 is $15,000.

Because you didn't record the withdrawal (check) from #1 then Cash #1 is overstated by $5,000.

Here are the journal entries shown in the order of the problem:

12/31/2007

dr Cash #2 $5,000

cr Cash Transfers $5,000

To deposit the check from Cash #1

01/05/2008

dr Cash Transfers $5,000

cr Cash #1 $5,000

To write the check deposited into Cash #2 on 12/31/07

Bank Recon at 12/31/07 as shown in the problem:

Cash #1 Beginning Balance = $10,000

Cash #1 Ending Balance = $10,000

Cash #2 Beginning Balance = $10,000

Deposit in Transit = $5,000

Cash #2 Ending Balance = $15,000

Here are the journal entries shown in the correct order:

12/31/2007

dr Cash Transfers $5,000

cr Cash #1 $5,000

To write the check from Cash #1

dr Cash #2 $5,000

cr Cash Transfers $5,000

To deposit the check from Cash #1 into Cash #2

Cash Transfers should ALWAYS be zero.

Bank Recon as it should have been:

Cash #1 Beginning Balance = $10,000

Outstanding Check = ($5,000)

Cash #1 Ending Balance = $5,000

Cash #2 Beginning Balance = $10,000

Outstanding Deposit = $5,000

Cash #2 Ending Balance = $15,000

It matters that cash was received in year 1 and disbursed in year 2 because you overstate your assets on the balance sheet by doing this. The main reason they give you the dates the check and deposit cleared the bank is to confuse you. You only really need those dates if the disbursement and receipt are posted correctly but the check hasn't cleared the bank. For example: Let say you wrote a check for $100 from account #1 and made a deposit into account #2 for $100 on 12/30/11. The deposit could post in account #2 on 12/31/11 but the check may not show up on the banks books for account #1 until 1/2/12. In that case when you look at the Bank Recon for account #1 on 12/31/11, you would see an outstanding check for $100.

I know this is long but I hope I explained it so that you could understand it.

[SoCalCPA]

wow Kricket, you are too nice haha. Thanks so much!!! Greatly appreciate it.

B - (4/2012)
A - (5/2012)
R - (1/2012) Done!
F - (10/2011) Done!

[Author]

Replies