DGK Company maintains a lockbox account to facilitate the collection of its accounts receivable. All of the company’s cash receipts from credit sales are sent directly to a post office box held in the company’s name, which is accessed directly by bank personnel. Each day the bank processes the receipts, credits DGK’s account, and provides the company with a hard copy package, which includes a detail and summary listing of all checks deposited, copies of actual checks, invoices, enclosures, and envelopes. The company usually receives its hard copy packages a day after the bank has processed the receipts. In addition, DGK Company has authorized the bank to apply “collected balances” (balances for which the holding period allowed for collection and return of deposited items has elapsed) directly against the company’s outstanding line of credit with the bank, unless instructed otherwise by the company. The company receives hard copy notices of amounts applied, generally within two business days. The accounting records for DGK Company contain the following details for December 2007:
1. Balance per bank for the lockbox account, 12/31/07 ...... $55,000
2. Balance per books, 12/31/07 .............. 50,050
3. Deposit in transit from cash sales ............ 5,000
4. Lockbox receipts, 12/31/07 ............... 30,000
5. Collected balances applied to line of credit on 12/31/07 .... 20,000
6. Bank service charge for December .............. 50
7. No checks are drawn on the lockbox account

Required
1. Explain how a lockbox account might benefit a company.
2. Prepare a December 31, 2007 bank reconciliation of DGK Company’s lockbox bank account.
3. Prepare any journal entries necessary to adjust DGK Company’s books to reflect the results of the reconciliation performed in Requirement 2. (Contributed by Daryl G. Krause.)