ACCOUNTING BANK QUESTIONS
1 What may be included under the heading of “cash”?
Cash normally consists of coins and currency on hand, bank deposits, and various kinds of orders for cash such as bank checks, money orders, travelers’ checks, demand bills of exchange, bank drafts, and cashiers’ checks. Balances on deposit in banks which are subject to immediate with-drawal are properly included in cash. Money market funds that provide checking account privileges may be classified as cash. There is some question as to whether deposits not subject to immediate withdrawal are properly included in cash or whether they should be set out separately. Savings accounts, certificates of deposit, and time deposits fall in this latter category. Unless restrictions on these kinds of deposits are such that they cannot be converted (withdrawn) within one year or the operating cycle of the entity, whichever is longer, they are properly classified as current assets. At the same time, they may well be
presented separately from other cash and the restrictions as to convertibility reported.
2 "In what accounts should the following items be classified?
a. Coins and currency.
b. Government bonds.
c. Certificate of deposit (matures in 5 months).
d. Cash in a bank that is in receivership.
e. NSF check (returned with bank statement).
f. Deposit in foreign bank (exchangeability limited).
g. Postdated checks.
h. Cash to be used for retirement of long-term bonds.
i. Deposits in transit.
j. 100 shares of Daimler (DEU) (intention is to sell in one year or less).
k. Savings and checking accounts.
l. Petty cash.
m. Stamps.
n. Travel advances."
"(a) Cash (h) Investments, possibly other assets.
(b) Investments (i) Cash.
(c) Temporary investments. (j) Trading securities.
(d) Accounts receivable. (k) Cash.
(e) Accounts receivable, a loss if uncollectible. (l) Cash.
(f) Other assets if not expendable, cash if ex- (m) Postage expense, or prepaid ex-
pendable for goods and services in the for- pense, or supplies inventory.
eign country. (n) Receivable from employee if the
(g) Receivable if collection expected within one company is to be reimbursed;
year; otherwise, other asset. otherwise, prepaid expense."
3 "Define a “compensating balance.” How should a compensating balance be
reported?"
"A compensating balance is that portion of any demand deposit maintained by a corporation which constitutes support for existing borrowing arrangements of a corporation with a lending institution.
A compensating balance representing a legally restricted deposit held against short-term borrowing arrangements should be stated separately among the cash and cash equivalent items. A restricted deposit held as a compensating balance against long-term borrowing arrangements should be separately classified as a noncurrent asset in either the investments or other assets section."
4 "Feng Group reported in a recent annual report “Restricted cash for debt
redemption.” What section of the statement of financial position would report this
item?"
Restricted cash for debt redemption would be reported in the long-term asset section, probably in the investments section. Another alternative is the other assets section. Given that the debt is long term, the restricted cash should also be reported as long term.
5 "What are the reasons that a company gives trade discounts? Why are trade
discounts not recorded in the accounts like cash discounts?"
The seller normally uses trade discounts to avoid frequent changes in its catalogs, to quote different prices for different quantities purchased, and to hide the true invoice price from competitors. Trade discounts are not recorded in the accounts because the price finally quoted is generally an accurate statement of the fair market value of the product on that date. In addition, no subsequent changes can occur to affect this value from an accounting standpoint. With a cash discount, the buyer receives a choice and events subsequent to the original transaction dictate that additional entries may be needed.
6 "What are two methods of recording accounts receivable transactions when a cash
discount situation is involved? Which is more theoretically correct? Which is used in
practice more of the time? Why?"
"Two methods of recording accounts receivable are:
(1) Record receivables and sales gross.
(2) Record receivables and sales net.
The net method is desirable from a theoretical standpoint because it values the receivable at its cash realizable value. In addition, recording the sales at net provides a better assessment of the revenue that was recognized from the sale of the product. If the purchasing company fails to take the discount, then the company should reflect this amount as income. The gross method for receivables and sales is used in practice normally because it is expedient and its use does not generally have any significant effect on the presentation of the financial statements"
7 "Discuss the accounting for sales allowances and how they relate to the concept of
variable consideration."
When companies, sell a product with a sales allowance for possible dissatisfaction or other issues, they should record the accounts receivable and related revenue at the amount of consideration expected to be received. The use of a Sales Returns and Allowances account is helpful to management because it highlights the problems associated with inferior merchandise, inefficiencies in filling orders, or delivery or shipment mistakes. Thus, since management must estimate expected allowances to be granted in the future, which affects the final transaction price, sales allowances result in variable consideration.
8 What are the basic problems that occur in the valuation of accounts receivable?
The basic problems that relate to the valuation of receivables are (1) the determination of the face value of the receivable, (2) the probability of future collection of the receivable, and (3) the length of time the receivable will be outstanding. The determination of the face value of the receivable is a function of the trade discount, cash discount, and certain allowance accounts such as the Allowance for Sales Returns and Allowances.
9 "What is the theoretical justification of the allowance method as contrasted with the
direct write-off method of accounting for bad debts?"
"The theoretical superiority of the allowance method over the direct write-off method of accounting for bad debts is two-fold. First, since revenue is considered to be recognized at the point of sale on the assumption that the resulting receivables are valid liquid assets merely awaiting collection, peri-odic income will be overstated to the extent of any receivables that eventually become uncollectible. The proper matching of revenue and expense requires that gross sales in the income statement be partially offset by a charge to bad debt expense that is based on an estimate of the receivables arising from gross sales that will not be converted into cash.
Second, accounts receivable on the balance sheet should be stated at their estimated cash realiz-able value. The allowance method accomplishes this by deducting from gross receivables the allowance for doubtful accounts. The latter is derived from the charges for bad debt expense on the income statement."
10 "Indicate how the percentage-of-receivables method, based on an aging schedule,
accomplishes the objectives of the allowance method of accounting for bad debts.
What other methods, besides an aging analysis, can be used for estimating
uncollectible accounts?"
"The percentage-of-receivable method. Under this method Bad Debt Expense is debited and Allowance for Doubtful Accounts is credited for purposes of reporting accounts receivable at their estimated net realizable value in the balance sheet. From the stand-point of the income statement, however, the aging method may not match accurately bad debt expenses with the sales which caused them because the charge to bad debt expense is not based on sales. The accuracy of both the charge to bad debt expense and the reported value of receivables depends on the current estimate of uncollectible accounts. The accuracy of the expense charge, however, is additionally dependent upon the timing of actual write-offs.
Other methods that companies may use employ estimates based on historical loss ratios for customers with different credit ratings as a basis for estimating uncollectible accounts. Or a company may utilize a probability-weighted discounted cash flow model (as illustrated in Chapter 6) to estimate expected credit losses."
11 "Of what merit is the contention that the allowance method lacks the objectivity of
the direct write-off method? Discuss in terms of accounting’s measurement function."
"A major part of accounting is the measurement of financial data. Estimates of uncollectibility should be recognized so that receivables are reported at net realizable value and in order for accounting to provide useful information on a periodic basis.
The very existence of accounts receivable is based on the decision that a credit sale is an objec-tive indication that revenue should be recognized. The alternative is to wait until the debt is paid in cash. If revenue is to be recognized and an asset recorded at the time of a credit sale, the need for fairness in the statements requires that both expenses and the asset be adjusted for the estimated amounts of the asset that experience indicates will not be collected.
The argument may be persuasive that the evidence supporting write-offs permits a more accurate decision than that which supports the allowance method. The latter method, however, is “objective” in the sense in which accountants use the term and is justified by the need for fair presentation of receivables and income. The direct write-off method is not wholly objective; it requires the use of judgment in determining when an account has become uncollectible."
12 Explain how the accounting for bad debts can be used for earnings management.
Because estimation of the allowance account balance requires judgment, management could either over-estimate or under-estimate the amount of uncollectible accounts depending on whether a higher or lower earnings number is desired. For example, Sun Trust bank (referred to in the chapter) was having a very profitable year. By over-estimating the amount of bad debts, Sun Trust could record a higher allowance and expense, thereby reducing income in the current year. In a subsequent year, when earnings are low, they could under-estimate the allowance, record less expense and get a boost to earnings.
13 "Because of calamitous earthquake losses, Bernstein Company, one of your client’s
oldest and largest customers, suddenly and unexpectedly became bankrupt.
Approximately 30% of your client’s total sales have been made to Bernstein Company
during each of the past several years. The amount due from Bernstein Company—
none of which is collectible—equals 22% of total accounts receivable, an amount that
is considerably in excess of what was determined to be an adequate provision for
doubtful accounts at the close of the preceding year. How would your client record the
write-off of the Bernstein Company receivable if it is using the allowance method of
accounting for bad debts? Justify your suggested treatment."
"The receivable due from Bernstein Company should be written off to an appropriately named loss account and reported in the income statement as part of income from operations. In this case, classification as an unusual item would seem appropriate. The loss may properly be reduced by the portion of the allowance for doubtful accounts at the end of the preceding year that was allocable to the Bernstein Company account.
Estimates for doubtful accounts are based on a firm’s prior bad debt experience with due consideration given to changes in credit policy and forecasted general or industry business conditions.
The purpose of the allowance method is to anticipate only that amount of bad debt expense which can be reasonably forecasted in the normal course of events."
14 "What is the normal procedure for handling the collection of accounts receivable
previously written off using the direct write-off method? The allowance method?"
If the direct write-off method is used, the only alternative is to debit Cash and credit a revenue account entitled Uncollectible Amounts Recovered. If the allowance method is used, then the accountant would debit Accounts Receivable and credit the Allowance for Doubtful Accounts. An entry is then made to credit the customer’s account and debit Cash upon receipt of the remittance
15 "On January 1, 2022, Antorio SpA sells property for which it had paid €690,000 to
Sargent Company, receiving in return Sargent’s zero-interest-bearing note for
€1,000,000 payable in 5 years. What entry would Antorio make to record the sale,
assuming that Antorio frequently sells similar items of property for a cash sales price
of €640,000?"
"The journal entry on Antonio’s books would be:
Notes Receivable ............................................................................. 1,000,000
Discount on Notes Receivable .................................................... 360,000
Sales Revenue ............................................................................ 640,000*
*Assumes that seller is a dealer in this property. If not, the property might be credited, and a loss on sale of $50,000 would be recognized."
16 "What is “imputed interest”? In what situations is it necessary to impute an
interest rate for notes receivable? What are the considerations in imputing an
appropriate interest rate?"
"Imputed interest is the interest ascribed or attributed to a situation or circumstance which is void of a stated or otherwise appropriate interest factor. Imputed interest is the result of a process of interest rate estimation called imputation.
An interest rate is imputed for notes receivable when (1) no interest rate is stated for the transaction, or (2) the stated interest rate is unreasonable, or (3) the stated face amount of the note is materially different from the current cash price for the same or similar items or from the current market value of the debt instrument.
In imputing an appropriate interest rate, consideration should be given to the prevailing interest rates for similar instruments of issuers with similar credit ratings, the collateral, and restrictive covenants."
17 "Indicate three reasons why a company might sell its receivables to another
company."
A company might sell receivables because money is tight and access to normal credit is not available or prohibitively expensive. Also, a company may have to sell its receivables, instead of borrowing, to avoid violating existing lending arrangements. In addition, billing and collection of receivables are often time-consuming and costly.
18 "When is the risks and rewards approach to recording the transfers of receivables
used? When should a transfer of receivables be recorded as a sale?"
The risks and rewards approach is used when receivables are sold with or without recourse (or guarantee). A transfer of receivables should be recorded as a sale when the seller has transferred substantially all the risks and rewards of ownership of the financial asset. If the substantially all of the risks and rewards are not transferred, the company treats the transfer as a secured borrowing.
19 "Moon Hardware is planning to factor some of its receivables. The cash received
will be used to pay for inventory purchases. The factor has indicated that it will
require a full guarantee (with recourse) on the sold receivables. Explain to the
controller of Moon Hardware what “full guarantee” is and how the guarantee will be
reflected in Moon’s financial statements after the sale of the receivables."
Full guarantee (recourse) is a guarantee from Moon that if any of the sold receivables are uncollectible, Moon will pay the factor for the amount of the uncollectible account. This guarantee represents continuing involvement by Moon after the sale. Under the risks and rewards model, the face value of the receivables factored will be reported as a liability on Moon’s statement of financial position.
20 "Horizon Outfitters AG includes in its trial balance for December 31 an item for
Accounts Receivable €789,000. This balance consists of the following items:
Illustrate how these items should be shown in the statement of financial position as
of December 31."
"Several acceptable solutions are possible depending upon assumptions made as to whether certain items are collectible within the operating cycle or not. The following illustrates one possibility:
Current Assets
Accounts receivable—Trade (of which accounts in the amount
of $75,000 have been assigned as security for loans payable)
(€523,000 + €75,000) .......................................................................................... €598,000
Federal income tax refund receivable .................................................................. 15,500
Advance payments on purchases ........................................................................ 61,000
Non-Trade receivables
Advance to subsidiary ......................................................................................... 45,500
Other Assets
Travel advance to employees .............................................................................. 22,000
Notes receivable past due plus accrued interest .................................................. 47,000"
21 "What is the accounts receivable turnover, and what type of information does it
provide?"
The accounts receivable turnover ratio is computed by dividing net sales by average net receiv-ables outstanding during the year. This ratio is used to assess the liquidity of the receivables. It measures the number of times, on average, receivables are collected during the period. It provides some indication of the quality of the receivables and how successful the company is in collecting its outstanding receivables.
22 "You are evaluating Woodlawn Racetrack for a potential loan. An examination of
the notes to the financial statements indicates restricted cash at year-end amounts to
$100,000. Explain how you would use this information in evaluating Woodlawn’s
liquidity."
Because the restricted cash cannot be used by Woodlawn to meet current obligations, it should not be reported as a current asset—it should be reported in investments or other assets. Thus, although this item has cash in its label, it should not be reflected in liquidity measures, such as the current or acid-test ratios.
23 "Distinguish among the following: (1) a general checking account, (2) an imprest
bank account, and (3) a lockbox account"
"(1) The general checking account is the principal bank account of most companies and fre-quently the only bank account of small companies. Most if not all transactions are cycled through the general checking account, either directly or on an imprest basis.
(2) Imprest bank accounts are used to disburse cash (checks) for a specific purpose, such as dividends, payroll, commissions, or travel expenses. Money is deposited in the imprest fund from the general fund in an amount necessary to cover a specific group of disbursements.
(3) Lockbox accounts are local post office boxes to which a multi-location company instructs its customers to mail remittances. A local bank is authorized to empty the box daily and credit the company’s accounts for collections.
"
Brief Exercises
BE7.1 "(LO 1) Kraft Enterprises owns the following assets at December 31, 2022.
Cash in bank—savings account €68,000
Cash on hand 9,300
Tax refund due 31,400
Checking account balance 17,000
Postdated checks 750
Certificates of deposit (180-day) 90,000
What amount should be reported as cash?"
"BRIEF EXERCISE 7.1
Cash in bank—savings account ...............................
€68,000
Cash on hand .............................................................
9,300
Checking account balance ........................................
17,000
Cash to be reported ...................................................
€94,300"
BE7.2 "(LO 2) Restin plc uses the gross method to record sales made on credit. On
June 1, 2022, it made sales of £50,000 with terms 3/15, n/45. On June 12, 2022,
Restin received full payment for the June 1 sale. Prepare the required journal entries
for Restin plc."
"BRIEF EXERCISE 7.2
June 1
Accounts Receivable ...........................
50,000
Sales Revenue .............................
50,000
June 12
Cash ......................................................
48,500*
Sales Discounts ...................................
1,500
Accounts Receivable ..................
50,000
*£50,000 – (£50,000 X .03) = £48,500"
BE7.3 "(LO 2) Use the information from BE7.2, assuming Restin plc uses the net
method to account for cash discounts. Prepare the required journal entries for Restin
plc."
"BRIEF EXERCISE 7.3
June 1
Accounts Receivable ...........................
48,500*
Sales Revenue .............................
48,500
June 12
Cash ......................................................
48,500
Accounts Receivable ..................
48,500
*£50,000 – (£50,000 X .03) = £48,500"
BE7.4 "(LO 3) Roeher Company sold $9,000 of its specialty shelving to Elkins Office
Supply Co. on account. Prepare the entries when (a) Roeher makes the sale, (b)
Roeher grants an allowance of $700 when some of the shelving does not meet exact
specifications but still could be sold by Elkins, and (c) at year-end, Roeher estimates
that an additional $200 in allowances will be granted to Elkins."
"BRIEF EXERCISE 7.4
(a)
Accounts Receivable ...........................
9,000
Sales Revenue .............................
9,000
(b)
Allowance for Sales Returns and Allowances ..................................
700
Accounts Receivable ..................
700
(c)
Sales Returns and Allowances ...........
200
Allowance for Sales Returns and Allowances...........................
200"
BE7.5 "(LO 3) Wilton, AG had net sales in 2022 of €1,400,000. At December 31, 2022,
before adjusting entries, the balances in selected accounts were Accounts Receivable
€250,000 debit, and Allowance for Doubtful Accounts €2,400 credit. If Wilton
estimates that 8% of its receivables will prove to be uncollectible, prepare the
December 31, 2022, journal entry to record bad debt expense."
"Bad Debt Expense ...........................................................
17,600
Allowance for Doubtful Accounts ..........................
17,600
[(€250,000 X 8%) – €2,400]"
BE7.6 "(LO 3) Use the information presented in BE7.5 for Wilton, AG.
a. Instead of an Allowance for Doubtful Accounts Balance of €2,400 credit, the
balance was €1,900 debit. Assume that 10% of accounts receivable will prove to
be uncollectible. Prepare the entry to record bad debt expense.
b. Instead of estimating uncollectibles based on a percentage of receivables, assume
Wilton prepares an aging schedule that estimates total uncollectible accounts at
€24,600. (Assume an allowance of €2,400 credit.) Prepare the entry to record bad
debt expense."
"(a)
Bad Debt Expense ...........................................................
26,900
Allowance for Doubtful Accounts
[(10% X €250,000) + €1,900].................................
26,900
(b)
Bad Debt Expense ...........................................................
22,200
Allowance for Doubtful Accounts
(€24,600 – €2,400) ................................................
22,200"
BE7.7 "(LO 4) Milner Family Importers sold goods to Tung Decorators for $30,000
on November 1, 2022, accepting Tung’s $30,000, 6-month, 6% note. Prepare Milner’s
November 1 entry, December 31 annual adjusting entry, and May 1, 2023, entry for the
collection of the note and interest."
"11/1/19
Notes Receivable .............................................................
30,000
Sales Revenue ........................................................
30,000
12/31/19
Interest Receivable ..........................................................
300
Interest Revenue
($30,000 X 6% X 2/12) ..........................................
300
5/1/20 Cash 30,900
Interest Receivable 300
Interest Revenue 600
Notes Receivable 30,000"
BE7.8 "(LO 4) On January 1, 2022, Deng Acrobats lent NT$16,529 to Donaldson, Inc.,
accepting Donaldson’s 2-year, NT$20,000, zero-interest-bearing note. The implied
interest rate is 10%. Prepare Deng’s journal entries for the initial transaction,
recognition of interest each year, and the collection of NT$20,000 at maturity."
"Notes Receivable .............................................................
16,529
Cash ........................................................................
16,529
Notes Receivable .............................................................
1,653
Interest Revenue
NT$16,529 X 10% .................................................
1,653
Notes Receivable .............................................................
1,818
Interest Revenue
(NT$16,529 + NT$1,653) X 10% ...........................
1,818
Cash .................................................................................
20,000
Notes Receivable ....................................................
20,000"
BE7.9 "(LO 4) Modest Mouse SE had the following information related to an account
receivable from Counting Crows Inc. Initial face value, €22,000; payments received,
€3,000; provision for uncollectibility, €5,000. Determine the cash realizable value for
the Counting Crows receivable."
"Initial face value ...............................................................
€22,000
Less: Payments received ...............................................
€3,000
Provision for uncollectibility ...............................
5,000
8,000
Cash realizable value ......................................................
€14,000"
BE7.10 "(LO 5) On October 1, 2022, Chung Group assigns ¥1,000,000 of its accounts
receivable to Seneca National Bank as collateral for a ¥750,000 note. The bank
assesses a finance charge of 2% of the receivables assigned and interest on the note of
9%. Prepare the October 1, 2022, journal entries for both Chung and Seneca."
"Chung, Inc.
Cash .................................................................................
730,000
Finance Charge (¥1,000,000 X 2%) .................................
20,000
Notes Payable.........................................................
750,000
Seneca National Bank
Notes Receivable.............................................................
750,000
Cash ........................................................................
730,000
Financing Revenue (¥1,000,000 X 2%) ..................
20,000"
BE7.11 "(LO 5) Wood SA factored €150,000 of accounts receivable with Engram
Factors, without guarantee of credit loss. Engram assesses a 2% finance charge of the
amount of accounts receivable and retains an amount equal to 6% of accounts
receivable for possible adjustments. Prepare the journal entry for Wood SA and
Engram Factors to record the factoring of the accounts receivable to Engram."
"Wood
Cash .................................................................................
138,000
Due from Factor ..............................................................
9,000*
Loss on Sale of Receivables ..........................................
3,000**
Accounts Receivable .............................................
150,000
*6% X €150,000 = €9,000
**2% X €150,000 = €3,000
Engram
Accounts Receivable ......................................................
150,000
Due to Wood ...........................................................
9,000
Financing Revenue ................................................
3,000
Cash ........................................................................
138,000"
12 "(LO 5) Use the information in BE7.11 for Wood SA. Assume that the
receivables are sold with recourse (guarantee). Prepare the journal entry for Wood to
record the sale."
"Wood
Cash .................................................................................
138,000
Due from Factor ...............................................................
9,000*
Finance Charge ...............................................................
3,000**
Recourse Liability ..................................................
150,000
*6% X €150,000 = €9,000
**2% X €150,000 = €3,000"
13 "(LO 5) Arness Woodcrafters sells $250,000 of receivables to Commercial
Factors, Inc. on a without guarantee basis. Commercial assesses a finance charge of
5% and retains an amount equal to 4% of accounts receivable. Prepare the journal
entry for Arness to record the sale."
"Cash $250,000 – [$250,000 X (.05 + .04)] ........................
227,500
Due from Factor ($250,000 X .04) ...................................
10,000
Loss on Sale of Receivables ..........................................
12,500*
Accounts Receivable .............................................
250,000
*($250,000 X .05)"
14 "(LO 5) Use the information presented in BE7.13 for Arness Woodcrafters but
assume that the receivables were sold with a full guarantee for credit losses. Prepare
the journal entry and discuss the effects on Arness’s financial statements."
"The entry for the sale now would be:
Cash $250,000 – [($250,000 X (.05 + .04)] .......................
227,500
Due from Factor ($250,000 X .04) ...................................
10,000
Finance Charge ($250,000 X .05) ....................................
12,500*
Recourse Liability .................................................
250,000
Arness’s financial statements would include a liability (Liability to Commercial Factors) since the receivables were sold with a full guarantee for credit losses."
15 "(LO 5) Recent financial statements of adidas (DEU) report net sales of
€21,915 million. Accounts receivable (net) are €2,410 million at the beginning of the
year and €2,315 million at the end of the year. Compute adidas’s accounts receivable
turnover. Compute adidas’s average collection period for accounts receivable in days."
"The accounts receivable turnover is computed as follows:
Net Sales
=
€10,799
= 7.01 times
Average Trade Receivables (net)
€1,459 + €1,624
2
The average collection period for accounts receivable in days is
365 days
=
365
= 52.07 days
Accounts Receivable Turnover
7.01"
16 "(LO 6) Finman plc designated Jill Holland as petty cash custodian and
established a petty cash fund of £200. The fund is reimbursed when the cash in the
fund is at £15. Petty cash receipts indicate funds were disbursed for office supplies
£94 and miscellaneous expense £87. Prepare journal entries for the establishment of
the fund and the reimbursement."
"Petty Cash........................................................................
200
Cash ........................................................................
200
Supplies ...........................................................................
94
Miscellaneous Expense ..................................................
87
Cash Over and Short .......................................................
4
Cash (£200 – £15) ...................................................
185"
17 "(LO 6) Horton Corporation is preparing a bank reconciliation and has
identified the following potential reconciling items. For each item, indicate if it is (1)
added to balance per bank statement, (2) deducted from balance per bank statement,
(3) added to balance per books, or (4) deducted from balance per books.
a. Deposit in transit $5,500.
b. Bank service charges $25.
c. Interest credited to Horton’s account $31.
d. Outstanding checks $7,422.
e. NSF check returned $377."
"(a) Added to balance per bank statement (1)
(b) Deducted from balance per books (4)
(c) Added to balance per books (3)
(d) Deducted from balance per bank statement (2)
(e) Deducted from balance per books (4)"
18 "(LO 6) Use the information presented in BE7.17 for Horton Corporation.
Prepare any entries necessary to make Horton’s accounting records correct and
complete."
"(b)
Office Expense (Bank Charges) .....................................
25
Cash ........................................................................
25
(c)
Cash .................................................................................
31
Interest Revenue ....................................................
31
(e)
Accounts Receivable ......................................................
377
Cash ........................................................................
377
Thus, all “Balance per Books” adjustments in the reconciliation require a journal entry."
Exercises
E7.1 "(LO 1) (Determine Cash Balance) The controller for Wallaby plc is
attempting to determine the amount of cash and cash equivalents to be reported on
its December 31, 2022, statement of financial position. The following information is
provided.
1. Commercial savings account of £600,000 and a commercial checking account
balance of £800,000 are held at First National Bank of Olathe.
2. Money market fund account held at Volonte Co. (a mutual fund organization)
permits Wallaby to write checks on this balance, £5,000,000.
3. Travel advances of £180,000 for executive travel for the first quarter of next year
(employee to reimburse through salary reduction).
4. A separate cash fund in the amount of £1,500,000 is restricted for the retirement
of long-term debt.
5. Petty cash fund of £1,000.
6. An I.O.U. from Marianne Koch, a company customer, in the amount of £150,000.
7. A bank overdraft of £110,000 has occurred at one of the banks the company uses
to deposit its cash receipts. At the present time, the company has no deposits at
this bank.
8. The company has two certificates of deposit, each totaling £500,000. These CDs
have a maturity of 120 days.
9. Wallaby has received a check from a customer that is dated January 12, 2023, in
the amount of £125,000.
10. Wallaby has agreed to maintain a cash balance of £500,000 at all times at First
National Bank of Olathe to ensure future credit availability.
11. Wallaby has purchased £2,100,000 of commercial paper of Sergio Leone Co.
which is due in 60 days.
12. Currency and coin on hand amounted to £7,700.
Instructions
a. Compute the amount of cash (and cash equivalents) to be reported on Wallaby
plc’s statement of financial position at December 31, 2022.
b. Indicate the proper reporting for items that are not reported as cash on the
December 31, 2022, statement of financial position."
"EXERCISE 7.1 (10–15 minutes)
(a) Cash includes the following:
1.
Commercial savings account—
First National Bank of Olathe ...................................
£ 600,000
1.
Commercial checking account—
First National Bank of Olathe ...................................
800,000
2.
Money market fund—Volonte ......................................
5,000,000
5.
Petty cash .....................................................................
1,000
11.
Commercial paper (cash equivalent) ..........................
2,100,000
12.
Currency and coin on hand .........................................
7,700
Cash reported on December 31, 2019, statement of financial position ...............................................................
(b) Other items classified as follows:
3. Travel advances (reimbursed by employee) * should be reported as receivable—employee in the amount of £180,000.
4. Cash restricted in the amount of £1,500,000 for the retirement of long-term debt should be reported as a noncurrent asset identi-fied as “Cash restricted for retirement of long-term debt.”
6. An IOU from Marianne Koch should be reported as a receivable in the amount of £150,000.
7. The bank overdraft of £110,000 should be reported as a current liability.**
8. Certificates of deposits of £500,000 each should be classified as temporary investments.
9. Postdated check of £125,000 should be reported as an accounts receivable.
10. The compensating balance requirement does not affect the bal-ance in cash. A note disclosure indicating the arrangement and the amounts involved should be described in the notes.
*If not reimbursed, charge to prepaid expense.
**If cash is present in another account in the same bank on which the overdraft occurred, offsetting is required."
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