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Multiple Choice
If a check is correctly written and paid by the bank for $450, but is erroneously recorded in the company's books as $540, how should this error be treated in the bank reconciliation?
A
Add $90 to the book balance
B
Subtract $90 from the book balance
C
Add $90 to the bank balance
D
No adjustment is necessary
Verified step by step guidance
1
Understand the nature of the error: The check was correctly written and paid by the bank for $450, but the company recorded it as $540 in its books. This means the company's book balance is overstated by $90 ($540 - $450).
Determine the impact of the error: Since the company's book balance is overstated, an adjustment is needed to reduce the book balance by the overstated amount.
Identify the adjustment required: To correct the error, subtract $90 from the book balance to align it with the actual amount paid by the bank.
Explain why no adjustment is needed for the bank balance: The bank has correctly processed the check for $450, so no changes are required to the bank balance.
Summarize the reconciliation step: The error is corrected by subtracting $90 from the book balance during the bank reconciliation process.