Treatment of NSF check



The bank statement of Stone Supplies included a $300 NSF check that one of the Stone’s customers had written to pay for services that were provided by Stone.



a. Show the effects of recognizing the NSF check on the financial statements by recording the appropriate amounts in a horizontal statements model like the following one:


Asset = Liab. + Equity Rev. ‘ Exp. = Net Inc. Cash Flow
Cash + Accts Rec.


b. Is the recognition of the NSF check on Stone’s books an asset source, use, or exchange transaction?


c. Suppose the customer redeems the check by giving Stone $325 cash in exchange for the bad check. The additional $25 paid a service fee charged by Stone. Show the effects on the financial statements in the horizontal statements model in Requirement a.


d. Is the receipt of cash referred to in Requirement c an asset source, use, or exchange transaction?


e. Record in general journal form the adjusting entry for the NSF check and the subsequent entry for redemption of the check by the customer.


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