2A - Cash and Cash Equivalents Flashcards
The following information pertains to Park Co. on December 31, 20X1:
Bank statement balance $10,000
Checkbook balance 14,000
Deposit in transit 5,000
Outstanding checks 1,000
In Park’s December 31, 20X1, balance sheet, cash should be reported as:
$14,000.
$9,000.
$10,000.
$15,000.
$14,000.
Since none of the information provided is an amount that is included in the bank statement balance but not included in the checkbook balance, the December 31, 20X1, checkbook balance of $14,000 is the balance sheet cash amount.
This amount is confirmed by the reconciliation of the bank statement balance:
Statement balance $10,000
Deposit in transit 5,000
Outstanding checks (1,000)
Cash balance (December 31, 20X1) $14,000
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On November 1, 20X1, Key Co. paid $3,600 to renew its only insurance policy for three years. On December 31, 20X1, Key’s unadjusted trial balance showed a balance of $90 for prepaid insurance and $4,410 for insurance expense. What amounts should be reported for prepaid insurance and insurance expense in Key’s December 31, 20X1, financial statements?
Prepaid insurance: $3,490; Insurance expense: $1,010
Prepaid insurance: $3,400; Insurance expense: $1,200
Prepaid insurance: $3,400; Insurance expense: $1,100
Prepaid insurance: $3,300; Insurance expense: $1,200
Prepaid insurance: $3,400; Insurance expense: $1,100
At the end of the period, the expired insurance should be moved into expense, leaving only the unexpired portions in prepaid insurance.
Prepaid insurance on November 1, 20X1 $3,600
Less November and December expense
2($3,600/36 months) 200
Prepaid insurance on December 31, 20X1 $3,400
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Insurance expense Total payments Prepaid insurance
on December 31, 20X1 = for insurance - balance
= ($90 + $4,410) - $3,400
= $4,500 - $3,400
= $1,100
Note: Because the trial balance does not show a prepaid amount for the $3,600, and the $90 amount is too small to relate reasonably to the renewal policy, it can be assumed that the books need to be adjusted to transfer the correct prepaid amount ($3,400) from expense and expense the $90, which likely represents the expired remainder of the old policy.
Alton Co. had a cash balance of $32,300 recorded in its general ledger at the end of the month, prior to receiving its bank statement. Reconciliation of the bank statement reveals the following information:
Bank service charge: $15
Check deposited and returned for insufficient funds check: $120
Deposit recorded in the general ledger as $258 but should be $285
Checks outstanding: $1,800
After reconciling its bank statement, what amount should Alton report as its cash account balance?
$30,338
$30,392
$32,192
$32,138
$32,192
Alton’s cash balance is $32,192, calculated as follows:
Balance per books $32,300
Less bank’s service charge (15)
Less NSF check (120)
Plus net difference from check error ($285-$258) 27
Adjusted book balance = $32,192
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Checks outstanding have already been deducted from the book balance of $32,300.
At June 30, Almond Co.’s cash balance was $10,012 before adjustments, while its ending bank statement balance was $10,772. Check number 101 was issued June 2 in the amount of $95, but was erroneously recorded in Almond’s general ledger balance as $59. The check was correctly listed in the bank statement at $95. The bank statement also included a credit memo for interest earned in the amount of $35, and a debit memo for monthly service charges in the amount of $50. What was Almond’s adjusted cash balance at June 30?
$10,048
$9,598
$10,462
$9,961
$9,961
Given the information in the question, the company’s cash balance should be adjusted to determine the adjusted cash balance. It is computed as follows:
Balance per books, June 30 $10,012 Add: Interest revenue 35 Deduct: Service charges (50) Correction of check (36) Adjusted cash balance $ 9,961
The following are held by Smite Co.:
Cash in checking account $20,000
Cash in bond sinking fund account 30,000
Postdated check from customer dated
1 month from balance sheet date 250
Petty cash 200
Commercial paper (matures in 2 months) 7,000
Certificate of deposit (matures in 6 months) 5,000
What amount should be reported as cash and cash equivalents on Smite’s balance sheet?
$57,200
$27,450
$32,200
$27,200
$27,200
Cash includes cash in the checking account and the petty cash. Cash equivalents are short-term, highly liquid investments. They must be convertible to known amounts of cash and generally have maturities when purchased of not more than three months. The commercial paper qualifies as a cash equivalent because it is highly liquid and matures within three months of the balance sheet date. The sinking fund would be restricted cash, and the postdated check is still a receivable
Inch Co. had the following balances at December 31, 20X2:
Cash in checking account $ 35,000
Cash in money market account 75,000
U.S. Treasury bill, purchased 12/1/X2, maturing 2/28/X3 200,000
U.S. Treasury bill, purchased 12/1/X1, maturing 5/31/X3 150,000
Inch’s policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Inch report as cash and cash equivalents in its December 31, 20X2, balance sheet?
$110,000
$460,000
$235,000
$310,000
$310,000
Cash and cash equivalents on Inch Co.’s December 31, 20X2, balance sheet would include:
Cash in checking account $ 35,000
Cash in money market account 75,000
U.S. Treasury bill, purchased 12/1/X2, maturing 2/28/X3 200,000
Total $310,000
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The $150,000 Treasury bill had a maturity of 18 months when purchased and should be classified as an investment.
Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31 of the current year, the bank reconciliations for Smith are as follows:
Big Bank
Bank balance $150,000
Deposit in transit 5,000
Book balance 155,000
Small Bank Bank balance (1,500) Outstanding checks (8,500) Book balance (7,000) What amount should be classified as cash on Smith's balance sheet at December 31?
$156,000
$148,000
$151,000
$155,000
$155,000
The balance in the account at Big Bank of $155,000 would be the only amount included in cash. The negative balance in Small Bank would be classified as a current liability.
The following information pertains to Grey Co. on December 31, 20X1:
Checkbook balance $12,000
Bank statement balance 16,000
Check drawn on Grey’s account, payable
to a vendor, dated and recorded
December 31, 20X1, but not mailed
until January 10, 20X2 1,800
On Grey’s December 31, 20X1, balance sheet, what amount should be reported as cash?
$14,200
$16,000
$13,800
$12,000
$13,800
Since the check was held for several days in January, the $1,800 amount should be added back to cash and accounts payable as of December 31, 20X1. Thus:
Checkbook balance (December 31, 20X1) $ 12,000
Amount of check + 1,800
Cash reported on December 31, 20X1 $ 13,800
Star Corp. had the following accounts and balances in its general ledger as of December 31:
Petty cash $ 500 XYZ Bank - checking account 20,000 Marketable equity security 10,000 Marketable debt security 7,500 ABC Bank - depository account 5,000 What amount should Star report as cash and cash equivalents in the balance sheet as of December 31?
$42,500
$25,000
$25,500
$35,000
$25,500
Star should report $25,500 ($500 petty cash + $20,000 checking account + $5,000 depository account) in cash and cash equivalents. Marketable securities are current assets or long-term assets depending on the holding intent of the owner, not cash and cash equivalents.
____ ______are short-term, highly liquid investments that are readily convertible to known amounts of cash and are so near maturity that they represent insignificant risk of changes in value due to changes in interest rates. (Generally, only investments with original maturities of three months or less qualify as cash equivalents, such as Treasury bills, commercial paper, money market funds, and federal funds sold.)
Cash equivalents
Trans Co. had the following balances at December 31, 20X1:
Cash in checking account $ 35,000
Cash in money market account 75,000
U.S. Treasury bill,
purchased 11/01/20X1, maturing 01/31/20X2 350,000
U.S. Treasury bill,
purchased 12/01/20X1, maturing 03/31/20X2 400,000
Trans’ policy is to treat as cash equivalents all highly liquid investments with a maturity of three months or less when purchased. What amount should Trans report as cash and cash equivalents in its December 31, 20X1, balance sheet?
$110,000
$385,000
$860,000
$460,000
$460,000
To calculate the cash and cash equivalents balance, add the cash in money market account and the U.S. Treasury bill purchased on November 1, 20X1, to the cash in checking account ($35,000 + $75,000 + $350,000 = $460,000). Balance at December 31, 20X1 = $460,000.
FASB ASC 210-10-20 defines cash equivalents as highly liquid investments with original maturities of less than or equal to three months. Cash in a money market account is a cash equivalent, as is the U.S. Treasury bill purchased on November 1, 20X1, maturing January 31, 20X2. The U.S. Treasury bill, purchased December 1, 20X1, maturing March 31, 20X2, has an original maturity of greater than three months, and is therefore not a cash equivalent.
FASB ASC 210-10-20 defines ____ _____ as highly liquid investments with original maturities of less than or equal to ____months.
cash equivalents
three
Light Co. had the following bank reconciliation at March 31:
Balance per bank statement, 3/31 $23,250
Add: Deposit in transit 5,150
$28,400
Less: Outstanding checks 6,300
Balance per books, 3/31 $22,100
Additional information from Light’s bank statement for the month of April is as follows:
Deposits $29,200
Disbursements 24,800
All reconciling items at March 31 cleared through the bank in April. Outstanding checks at April 30 totaled $3,200. What is the amount of cash disbursements per books in April?
$27,900
$21,700
$28,000
$24,800
$21,700
This question is not asking for a full bank reconciliation. It is only asking for the cash disbursements per the company’s books for the month of April. That value can be found by adjusting the cash disbursements per the bank statement for outstanding checks previously recorded and those disbursements currently recorded but not yet paid from the bank in the following manner:
$24,800 Disbursements + $3,200 April outstanding checks − $6,300 March outstanding checks = $21,700 Book disbursements
On December 31, 20X1, Kale Co. had the following balances in the accounts it maintains at First State Bank:
Checking account 101 $175,000
Checking account 201 (10,000)
Money market account 25,000
90-day certificate of deposit
due February 28, 20X2 50,000
180-day certificate of deposit
due March 15, 20X2 80,000
Kale classifies investments with original maturities of three months or less as cash equivalents. On the December 31, 20X1, balance sheet, what amount should Kale report as cash and cash equivalents?
$200,000
$320,000
$190,000
$240,000
$240,000
Cash and cash equivalents on December 31, 20X1:
Checking account 101 $175,000
Checking account 201 (10,000)
Money market account 25,000
90-day certificate of deposit 50,000
Total $240,000
The 180-day (6-month) certificate of deposit would not be included in cash and cash equivalents because its original maturity is more than three months. Accounts with the same bank can be netted.
Hilltop Co.’s monthly bank statement shows a balance of $54,200. Reconciliation of the statement with company books reveals the following information:
Bank service charge: $10
Insufficient funds check: $650
Checks outstanding: $1,500
Deposits in transit: $350
Check deposited by Hilltop and cleared by the bank for $125, but improperly recorded by Hilltop as $152
What is the net cash balance after the reconciliation?
$53,077
$53,023
$53,050
$52,363
$53,050
Thus, starting with $54,200 and adding the $350 deposit in transit, and then subtracting the $1,500 checks outstanding, we get $53,050
The other items would be adjustments to unadjusted ending cash balance, which we do not have, the check error being the company’s error, not the bank’s error.
