Chapter 1
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CHAPTER 1 CASH AND CASH EQUIVALENTS
DEFINITION OF CASH As contemplated in accounting, cash includes money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. Unrestricted Cash PAS 1, paragraph 66, which provides that an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period. Accordingly, to be reported as "cash" an item must be unrestricted in use. Cash items included in cash a. Cash on hand - This includes undeposited cash collections and other cash items awaiting deposit such as customers' checks, cashier's or manager's checks, traveler's checks, bank drafts and money orders. b. Cash in bank - This includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal. c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund.
Cash equivalents PAS 7, paragraph 6, defines cash equivalents as short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The standard further states that only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents.
Examples of cash equivalents are: a. Three-month BSP treasury bill b. Three-year BSP treasury bill purchased three months before date of maturity c. Three-month time deposit Three-month money market instrument or commercial paper Cash in foreign currency are measured a t foreign currency rate. Cash is measure at face value.
Measurement of cash If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty cash should be written down to estimated realizable value if the amount recoverable as estimated to be lower than the face value.
Cash fund for a certain purpose If the cash fund is set aside for use in current operations or for the payment of current obligation, it is a current asset. It is included as part of cash and cash equivalents. On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent obligation, it is shown as long-term investment.
Bank overdraft When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in the cash account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances
It is to be stated that generally overdrafts are not permitted in the Philippines. Exception to the rule on overdraft When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance in order to show cash, net of hank overdraft or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account. if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of cash management.
Compensating balance A compensating balance generally takes the form of minimum checking or demand/ deposit account balance that must be maintained in connection with a borrowing arrangement with a bank.
Classification of compensating balance If the deposit is not legally restricted as to withdrawal by the borrower because of an informal compensating balance agreement, the compensating balance is part of cash. If the deposit is legally restricted because of a formal compensating balance agreement,, the compensating balance is classified separately as "cash held as compensating balance" under current assets if the related loan is short-term. If the related loan is long-term, the compensating balance is classified as noncurrent investment.
Undelivered or Unreleased check An undelivered or unreleased check is one that merely drawn and recorded but not given to the payee before the end of reporting period.
Accordingly, an adjusting entry is required to restore the cash balance and set up the liability as follows: Cash
xx Accounts Receivable
xx
Postdated check delivered A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period. The original entry recording a delivered postdated check shall also be reserved and therefore restored to the cash balance as follows: Cash
xx Accounts payable appropriate account
xx
Stale check or check long outstanding A stale check is a check not encashed by the payee within a relatively long period of time. In banking practice. a check becomes stale if not encashed within six months from the time of issuance. Of course, this is a matter of entity policy. If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income as follows: Cash
xx Miscellaneous income
xx
However, if the amount is material and liability is expected to continue, the cash is restored and the liability is again set up. The journal entry is as follows: Cash
xx Accounts payable or appropriate account
Accounting for cash shortage
xx
Where the cash count shows cash which is less tha n, balance per book, there is a cash shortage to be recorded follows: Cash short or over
xx
Cash
xx
Hence, if the cashier or cash custodian is held responsible for the cash shortage, the adjustment should be: Due from cashier
xx
Cash short or over
xx
However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is Loss from cash shortage
xx
Cash short or over
xx
Accounting for cash overage Where
the
cash
count
shows
cash
which
is
more
than
balance per book, there is a cash overage to be recorded as follows: Cash
xx
Cash short or over
xx
The cash overage is treated as miscellaneous income if these is no claim on the- same. Cash short or over
xx
Miscellaneous income
xx
But where the cash overage is properly found to be the money of the cashier, the journal entry is: Cash short or over
xx
the
Payable to cashier
xx
Imprest System The imprest system is a system of control of cash which
re quires
that all cash receipts
should be deposited intact and all cash disbursements should be made by means of check. Petty cash fund The petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by means of check. There are two methods of handling the petty cash, namely: a. Imprest fund system b. Fluctuating fund system
Imprest fund system The imprest fund system is the one usually followed in handling petty cash transactions. Illustration 2019 Nov. 10 The entity established an imprest fund of P10,000 Petty cash fund Cash in bank
10,000 10,000
29 Replenished the fund. The petty cash items include the following: Currency and coin
2,000
Supplies
5,000
Telephone
1,800
Postage
1,200
29 The journal entry to record the replenishment is: Supplies
5,000
Telephone
1,800
Postage
1,200 Cash in bank
8,000
Dec 31 The fund was not replenished. The fund is composed of the following: currency and coin P7,000, supplies P1,500, postage P500, miscellaneous expense P1,000. Supplies
1,500
Postage
500
Miscellaneous
1,000
Petty cash fund
3,000
2020 Jan 1 The adjustment made on December 31,2019 is received. Petty cash fund
3,000
Supplies
1,500
Postage
500
Miscellaneous
1,000
Feb 1 The fund is replenished and increased to P15,000. The composition of the fund. Currency and coins
1,000
Supplies
4,500
Postage
3,000
Miscellaneous expense
1500
Total
10,000
Journal Entry Petty cash fund Supplies
5000
Postage
4500
Miscellaneous
3000
Cash in bank
14000
The total amount of the check drawn is P14,000 representing the petty cash disbursements of P9,000 and the fund increase of P5,000.
Fluctuating fund system The system is called “fluctuating fund system” because the checks drawn to replenish the fund do not necessarily equal the petty cash disbursements. Illustration Nov. 10 The entity established a petty cash fund of P10,000 Petty cash fund 10,000 Cash in bank
10,000
Nov.11-28 Petty cash disbursement amounted to P8,000
Expenses
8,000
Petty cash fund 8,000 Nov. 29 Issued a check for P10,000 to replenish the fund. Petty Cash fund 10,000 Cash in bank
10,000
At this point, the petty cash balance per book is P12,000 Dec1-30 Petty cash expenses amounted to P9,000 Expenses
9,000
Petty cash fund
9,000
31 Issued a check for P15,000 to replenish the fund. Expenses
15,000
Petty cash fund
15,000
At this point, the petty cash balance is P18,000.
PROBLEMS CASH AND CASH EQUIVALENTS Problem 1 Tranvia Company had the following balances on December 31,2018 Cash in checking account
350,000
Cash in money market account
750,000
Treasury bill, purchased November 1, 2018 maturity January 31 2019
3,500,000
Time deposit purchased December 1, 2018 maturing March 31 2019
4,000,000
What amount should be reported as cash and cash equivalents on December 31, 2018? a) 1,100,000 b) 3,850,000 c) 4,600,000 d) 8,600,000 Solution: C Cash in checking account
350,000
Cash in money market account
750,000
Treasury bill, purchased November 1, 2018 maturity January 31 2019
3,500,000
Total cash and cash equivalents
4,600,000
Under PAS 7, treasury bills, money market placement and time deposit normally qualify as cash equivalents only when they have short maturity of three months or less from the date of acquisition. In the absence of specific term, money market account is short term investment of three months or less. The treasury bill is classified as cash equivalent because the term is three months.
The time deposit is not a cash equivalent because the term is four months.
Problem 2 At year-end, Myra company reported cash and cash equivalents which comprised the following: Cash on hand
500,000
Demand deposit
4,000,000
Certificate of deposit
2,000,000
Postdated customer check
300,000
Petty cash fund
50,000
Traveler’s check
200,000
Manager’s check
100,000
Money order
150,000
What total amount should be reported as “cash” at year-end? a) 7,000,000 b) 4,800,000 c) 6,800,000 d) 5,000,000 Solution: D Cash on hand
500,000
Demand deposit
4,000,000
Petty cash fund
50,000
Travelers check
200,000
Managers check
100,000
Money order
150,000
Total cash
5,000,000
Technically, the bcertificate of deposit is a cash equivalent. The postdated customer check is reverted to accounts receivable.
Problem 3 Everlast Company reported the following information at year end:
Share investments of P1,000,000 that are very actively traded in the stock market
Government treasury bills of P2,000,000 with a 10 year term but purchased on December 31 at which time they had two months to go until maturity
Cash of P3,400,000 in the form of coin, currency, savings account and checking account
Commercial papers of P1,500,000 with term of nine months but purchased on December 31 at which time they had three months to go until maturirty.
1. What total amount should be reported as cash? a) 3,400,000 b) 4,900,000 c) 4,400,000 d) 5,400,000 2. What total number amount should be reported as cashequivalents? a) 2,000,000 b) 1,500,000 c) 3,500,000 d) 4,500,000
Solution: 1. A 2. C Cash-Coin,currency,saving and checking
3,400,000
Government treasury bills
2,000,000
Commerical papers
1,500,000
Total cash equivalents
3,500,000
The share investments cannot qualify as cash equivalents because although very actively traded the investments do not have a maturity. The commercial papers are actually money market placements. Problem 4 Campbell Company had the following account balances on December 31,2018 Petty cash fund
50,000
Cash in bank – current account
4,000,000
Cash in bank – payroll account
1,200,000
Cash in bank – sinking fund
2,000,000
Cash on hand
500,000
Cash in bank – restricted account for plant addition and expected to be distributed in 2019
1,500,000
Treasury bills
1,000,000
The petty cash fund included unreplenished December 2018 petty cash expense vouchers P5,000 and employee OIU P 5,000
The cash on hand included a P100,000 customer check payable to Campbell dated January 15, 2019 In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum balance of P200,000 in the unrestricted current bank account. The sinking fund is set aside to settle a bond payable that is due on June 30,2019. What total amount should be reported as cash and cash equivalent on December 31,2018? a) 8,640,000 b) 7,440,000 c) 7,640,000 d) 5,640,000
Solution: A Petty Cash Fund
40,000
Cash on hand
400,000
Current account
4,000,000
Payroll Account
1,200,000
Sinking fund
2,000,000
Treasury bills
1,000,000
Total cash and cash equivalents
8,640,000
Petty Cash Fund
50,000
Unreplenished petty cash vouchers
(5,000)
Employees IOU
(5,000)
Adjusted petty cash
40,000
Cash on hand
500,000
Customer check postdated January 31 2019
(100,000)
Adjusted cash on hand
400,000
The customer postdated check should be reverted to accounts receivable. The minimum balance of 1'200,000 to he maintained in the current account is included in cash because the current account is unrestricted. The sinking fund is included in cash and cash equivalents because the bond payable is already due within one year from the end of the reporting period. The classification of a cash fund should parallel the classification of the related liability. The cash in bank restricted for plant addition is classified as noncurrent regardless of the expected year of disbursement.
Problem 5 On December 31, 2018, Roma Company reported cash of P9,950,000 with the following details:
Undeposited collections
600,000
Cash in bank – BDO checking account
4,000,000
Undeposited NDF Check received from customer, dated December 1, 2018
150,000
Undeposited check from a customer dated January 15,2019
250,000
Cash in Bank – BDO fund for payroll
1,000,000
Cash in bank – BDO money market instrument, 90 days
2,000,000
Cash in foreign bank restricted
1,500,000
Cash in bank – BDO value added tax account
450,000
Total
9,950,000
On December 31 2018 what total amount should be reported as cash and cash equivalents? a) 7,600,000 b) 8,200,000 c) 6,050,000 d) 8,050,000
Solution: D Undeposited collections
600,000
BDO checking account
4,000,000
BDO payroll fund
1,000,000
BDO Money market
2,000,000
BDO Value added tax account
450,000
Total cash and cash equivalents
8,050,000
The NSF customer check and postdated customer check dated January 15, 2019 should be reverted to accounts receivable. The restricted cash in foreign bank is classified as noncurrent. Problem 6 Timex Company reported petty cash fund which comprised the following: Coins and Currency
3,300
Paid Vouchers: Transportation
600
Gasoline
400
Office Supplies
500
Postage stamps
300
Due from employees
1,200
Manager’s check returned by bank marked “NSF”
3,000 1,000
Check drawn by the entity to the order of petty cash custodian 2,700 What is the correct amount of petty cash fund for statement presentation purposes? a) 10,000 b) 7,000 c) 6,000 d) 9,000 Solution: C Coins and Currency
3,300
Check drawn by the entity to the order of petty cash custodian 2,700 Correct amount of petty cash
6,000
Problem 7 On December 31, 2018, Erika Company reported cash accounts balance per ledger of P9,500,000 included the following: Cash in bank- demand deposit
3,000,000
Time deposit – 30 days
500,000
NSF check of customer
200,000
Money market placement due on June 30, 2019
2,000,000
Saving deposit
1,000,000
IOU from an employee
300,000
Pension fund
1,500,000
Customer check dated January 31, 2019
600,000
Customer check outstanding for 18 months
400,000 9,500,000
Check of P100,000 in payment of accounts payable was dated and recorded on December 31, 2018 but mailed to creditors on January 15, 2019.
Check of P300,000 dated January 31,2019 in payment of accounts payable was recorded and mailed December 31, 2018.
The cash receipts journal was held open until January 25,2019, during which time P200,000 was collected and recorded on December 31,2018.
What total amount should be reported as cash and cash equivalents on December 31, 2018? a) 4,700,000 b) 6,700,000 c) 4,900,000 d) 5,100,000
Solution: A Cash in bank – demand deposit
3,200,000
Time deposit – 30 days
500,000
Savings deposit
1,000,000
Total cash and cash equivalents
4,700,000
Cash in bank – demand deposit
3,000,000
Undelivered check dated and recorded on
100,000
December 31 2018 but mailed on January 31, 2019 Check postdated January 31 2019 recorded on Dec 31 2018
300,000
Collections during January 2019 recorded on Dec 31 2018
(200,000)
Adjusted cash in bank
3,200,000
The undelivered check and postdated check should be restored to cash by debiting cash in bank and crediting accounts payable. The window dressing of collections during January 2019 should be reversed by debiting accounts receivable and crediting cash in bank The NSF customer check, postdated customer check dated January 31, 2019 and the customer check outstanding for 18 months should be reverted to accounts receivable. The money market placement is not a cash equivalent because the term is more than 3 months. The pension fund is a noncurrent investment.
Problem 8 Liwanag Company reported an imprest petty cash fund of P50,000 with the following details: Currencies
20,000
Coins
2,000
Petty cash vouchers: Gasoline payments for delivery equipment
3,000
Medical supplies for employees
1,000
Repair of office equipment
1,500
Loans to employees
3,500
A check drawn by the entity payable to the order of Grace de la cruz, petty cash custodian, representing her salary
15,000
An employee check returned by the bank for insufficiency of fund
3,000
A sheet of paper with names of several employees together with contribution for a birthday gift of a co-employee attached to the sheet of paper is a currency of
5,000
What amount of petty cash fund should be reported in the statement of financial position? a) 42,000 b) 27,000 c) 37,000 d) 22,000
Solution: C Currencies
20,000
Coins
2,000
Check drawn to the order of the petty cash custodian
15,000 37,000
The check drawn payable to the order of the petty cash custodian representing her salary is actually an accommodation check. Thus, the amount is included as part of cash.
Problem 9 Karla Company provided the following information on December 31, 2018: Cash on hand
500,000
Security Bank current account
1,000,000
PNB Current account No. 1
400,000
PNB Current account No. 2 (overdraft)
(50,000)
BSP treasury bill – 60 days
3,000,000
The cash on hand included a customer postdated check of P100,000 and postal money order of P40,000.
A check for P200,000 in payment of account was drawn against Security Bank account, dated January 15, 2019, delivered to the payee and recorded December 31, 2018.
What total amount of cash and cash equivalents should be reported on December 31,2018? a) 4,550,000 b) 5,050,000 c) 4,750,000 d) 1,950,000
Solution: A Cash on hand (500,000-100,000 postdated check)
400,000
Security Bank current account (1,000,000+200,000)
1,200,000
PNB current account No. 1
400,000
PNB current account No. 2
(50,000)
BSP treasury bill – 60 days
3,000,000
Total cash and cash equivalents
4,950,000
The bank overdraft is netted because it is in the same bank. The postal money order is part of cash. The postdated check delivered of P200,000 drawn against security bank is restored to cash in bank by debiting cash in bank and crediting accounts payable.
DEFINITION OF CASH As contemplated in accounting, cash includes money and other negotiable instrument that is payable in money and acceptable by the bank for deposit and immediate credit. Unrestricted Cash PAS 1, paragraph 66, which provides that an entity shall classify an asset as current when the asset is cash or a cash equivalent unless it is restricted to settle a liability for more than twelve months after the end of the reporting period. Accordingly, to be reported as "cash" an item must be unrestricted in use. Cash items included in cash a. Cash on hand - This includes undeposited cash collections and other cash items awaiting deposit such as customers' checks, cashier's or manager's checks, traveler's checks, bank drafts and money orders. b. Cash in bank - This includes demand deposit or checking account and saving deposit which are unrestricted as to withdrawal. c. Cash fund set aside for current purposes such as petty cash fund, payroll fund and dividend fund.
Cash equivalents PAS 7, paragraph 6, defines cash equivalents as short-term and highly liquid investments that are readily convertible into cash and so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. The standard further states that only highly liquid investments that are acquired three months before maturity can qualify as cash equivalents.
Examples of cash equivalents are: a. Three-month BSP treasury bill b. Three-year BSP treasury bill purchased three months before date of maturity c. Three-month time deposit Three-month money market instrument or commercial paper Cash in foreign currency are measured a t foreign currency rate. Cash is measure at face value.
Measurement of cash If a bank or financial institution holding the funds of an entity is in bankruptcy or financial difficulty cash should be written down to estimated realizable value if the amount recoverable as estimated to be lower than the face value.
Cash fund for a certain purpose If the cash fund is set aside for use in current operations or for the payment of current obligation, it is a current asset. It is included as part of cash and cash equivalents. On the other hand, if the cash fund is set aside for noncurrent purpose or payment of noncurrent obligation, it is shown as long-term investment.
Bank overdraft When the cash in bank account has a credit balance, it is said to be an overdraft. The credit balance in the cash account results from the issuance of checks in excess of the deposits. A bank overdraft is classified as a current liability and should not be offset against other bank accounts with debit balances
It is to be stated that generally overdrafts are not permitted in the Philippines. Exception to the rule on overdraft When an entity maintains two or more accounts in one bank and one account results in an overdraft, such overdraft can be offset against the other bank account with a debit balance in order to show cash, net of hank overdraft or bank overdraft, net of other bank account. An overdraft can also be offset against the other bank account. if the amount is not material. Under IFRS, bank overdraft can be offset against other bank account when payable on demand and often fluctuates from positive to negative as an integral part of cash management.
Compensating balance A compensating balance generally takes the form of minimum checking or demand/ deposit account balance that must be maintained in connection with a borrowing arrangement with a bank.
Classification of compensating balance If the deposit is not legally restricted as to withdrawal by the borrower because of an informal compensating balance agreement, the compensating balance is part of cash. If the deposit is legally restricted because of a formal compensating balance agreement,, the compensating balance is classified separately as "cash held as compensating balance" under current assets if the related loan is short-term. If the related loan is long-term, the compensating balance is classified as noncurrent investment.
Undelivered or Unreleased check An undelivered or unreleased check is one that merely drawn and recorded but not given to the payee before the end of reporting period.
Accordingly, an adjusting entry is required to restore the cash balance and set up the liability as follows: Cash
xx Accounts Receivable
xx
Postdated check delivered A postdated check delivered is a check drawn, recorded and already given to the payee but it bears a date subsequent to the end of reporting period. The original entry recording a delivered postdated check shall also be reserved and therefore restored to the cash balance as follows: Cash
xx Accounts payable appropriate account
xx
Stale check or check long outstanding A stale check is a check not encashed by the payee within a relatively long period of time. In banking practice. a check becomes stale if not encashed within six months from the time of issuance. Of course, this is a matter of entity policy. If the amount of stale check is immaterial, it is simply accounted for as miscellaneous income as follows: Cash
xx Miscellaneous income
xx
However, if the amount is material and liability is expected to continue, the cash is restored and the liability is again set up. The journal entry is as follows: Cash
xx Accounts payable or appropriate account
Accounting for cash shortage
xx
Where the cash count shows cash which is less tha n, balance per book, there is a cash shortage to be recorded follows: Cash short or over
xx
Cash
xx
Hence, if the cashier or cash custodian is held responsible for the cash shortage, the adjustment should be: Due from cashier
xx
Cash short or over
xx
However, if reasonable efforts fail to disclose the cause of the shortage, the adjustment is Loss from cash shortage
xx
Cash short or over
xx
Accounting for cash overage Where
the
cash
count
shows
cash
which
is
more
than
balance per book, there is a cash overage to be recorded as follows: Cash
xx
Cash short or over
xx
The cash overage is treated as miscellaneous income if these is no claim on the- same. Cash short or over
xx
Miscellaneous income
xx
But where the cash overage is properly found to be the money of the cashier, the journal entry is: Cash short or over
xx
the
Payable to cashier
xx
Imprest System The imprest system is a system of control of cash which
re quires
that all cash receipts
should be deposited intact and all cash disbursements should be made by means of check. Petty cash fund The petty cash fund is money set aside to pay small expenses which cannot be paid conveniently by means of check. There are two methods of handling the petty cash, namely: a. Imprest fund system b. Fluctuating fund system
Imprest fund system The imprest fund system is the one usually followed in handling petty cash transactions. Illustration 2019 Nov. 10 The entity established an imprest fund of P10,000 Petty cash fund Cash in bank
10,000 10,000
29 Replenished the fund. The petty cash items include the following: Currency and coin
2,000
Supplies
5,000
Telephone
1,800
Postage
1,200
29 The journal entry to record the replenishment is: Supplies
5,000
Telephone
1,800
Postage
1,200 Cash in bank
8,000
Dec 31 The fund was not replenished. The fund is composed of the following: currency and coin P7,000, supplies P1,500, postage P500, miscellaneous expense P1,000. Supplies
1,500
Postage
500
Miscellaneous
1,000
Petty cash fund
3,000
2020 Jan 1 The adjustment made on December 31,2019 is received. Petty cash fund
3,000
Supplies
1,500
Postage
500
Miscellaneous
1,000
Feb 1 The fund is replenished and increased to P15,000. The composition of the fund. Currency and coins
1,000
Supplies
4,500
Postage
3,000
Miscellaneous expense
1500
Total
10,000
Journal Entry Petty cash fund Supplies
5000
Postage
4500
Miscellaneous
3000
Cash in bank
14000
The total amount of the check drawn is P14,000 representing the petty cash disbursements of P9,000 and the fund increase of P5,000.
Fluctuating fund system The system is called “fluctuating fund system” because the checks drawn to replenish the fund do not necessarily equal the petty cash disbursements. Illustration Nov. 10 The entity established a petty cash fund of P10,000 Petty cash fund 10,000 Cash in bank
10,000
Nov.11-28 Petty cash disbursement amounted to P8,000
Expenses
8,000
Petty cash fund 8,000 Nov. 29 Issued a check for P10,000 to replenish the fund. Petty Cash fund 10,000 Cash in bank
10,000
At this point, the petty cash balance per book is P12,000 Dec1-30 Petty cash expenses amounted to P9,000 Expenses
9,000
Petty cash fund
9,000
31 Issued a check for P15,000 to replenish the fund. Expenses
15,000
Petty cash fund
15,000
At this point, the petty cash balance is P18,000.
PROBLEMS CASH AND CASH EQUIVALENTS Problem 1 Tranvia Company had the following balances on December 31,2018 Cash in checking account
350,000
Cash in money market account
750,000
Treasury bill, purchased November 1, 2018 maturity January 31 2019
3,500,000
Time deposit purchased December 1, 2018 maturing March 31 2019
4,000,000
What amount should be reported as cash and cash equivalents on December 31, 2018? a) 1,100,000 b) 3,850,000 c) 4,600,000 d) 8,600,000 Solution: C Cash in checking account
350,000
Cash in money market account
750,000
Treasury bill, purchased November 1, 2018 maturity January 31 2019
3,500,000
Total cash and cash equivalents
4,600,000
Under PAS 7, treasury bills, money market placement and time deposit normally qualify as cash equivalents only when they have short maturity of three months or less from the date of acquisition. In the absence of specific term, money market account is short term investment of three months or less. The treasury bill is classified as cash equivalent because the term is three months.
The time deposit is not a cash equivalent because the term is four months.
Problem 2 At year-end, Myra company reported cash and cash equivalents which comprised the following: Cash on hand
500,000
Demand deposit
4,000,000
Certificate of deposit
2,000,000
Postdated customer check
300,000
Petty cash fund
50,000
Traveler’s check
200,000
Manager’s check
100,000
Money order
150,000
What total amount should be reported as “cash” at year-end? a) 7,000,000 b) 4,800,000 c) 6,800,000 d) 5,000,000 Solution: D Cash on hand
500,000
Demand deposit
4,000,000
Petty cash fund
50,000
Travelers check
200,000
Managers check
100,000
Money order
150,000
Total cash
5,000,000
Technically, the bcertificate of deposit is a cash equivalent. The postdated customer check is reverted to accounts receivable.
Problem 3 Everlast Company reported the following information at year end:
Share investments of P1,000,000 that are very actively traded in the stock market
Government treasury bills of P2,000,000 with a 10 year term but purchased on December 31 at which time they had two months to go until maturity
Cash of P3,400,000 in the form of coin, currency, savings account and checking account
Commercial papers of P1,500,000 with term of nine months but purchased on December 31 at which time they had three months to go until maturirty.
1. What total amount should be reported as cash? a) 3,400,000 b) 4,900,000 c) 4,400,000 d) 5,400,000 2. What total number amount should be reported as cashequivalents? a) 2,000,000 b) 1,500,000 c) 3,500,000 d) 4,500,000
Solution: 1. A 2. C Cash-Coin,currency,saving and checking
3,400,000
Government treasury bills
2,000,000
Commerical papers
1,500,000
Total cash equivalents
3,500,000
The share investments cannot qualify as cash equivalents because although very actively traded the investments do not have a maturity. The commercial papers are actually money market placements. Problem 4 Campbell Company had the following account balances on December 31,2018 Petty cash fund
50,000
Cash in bank – current account
4,000,000
Cash in bank – payroll account
1,200,000
Cash in bank – sinking fund
2,000,000
Cash on hand
500,000
Cash in bank – restricted account for plant addition and expected to be distributed in 2019
1,500,000
Treasury bills
1,000,000
The petty cash fund included unreplenished December 2018 petty cash expense vouchers P5,000 and employee OIU P 5,000
The cash on hand included a P100,000 customer check payable to Campbell dated January 15, 2019 In exchange for a guaranteed line of credit, the entity has agreed to maintain a minimum balance of P200,000 in the unrestricted current bank account. The sinking fund is set aside to settle a bond payable that is due on June 30,2019. What total amount should be reported as cash and cash equivalent on December 31,2018? a) 8,640,000 b) 7,440,000 c) 7,640,000 d) 5,640,000
Solution: A Petty Cash Fund
40,000
Cash on hand
400,000
Current account
4,000,000
Payroll Account
1,200,000
Sinking fund
2,000,000
Treasury bills
1,000,000
Total cash and cash equivalents
8,640,000
Petty Cash Fund
50,000
Unreplenished petty cash vouchers
(5,000)
Employees IOU
(5,000)
Adjusted petty cash
40,000
Cash on hand
500,000
Customer check postdated January 31 2019
(100,000)
Adjusted cash on hand
400,000
The customer postdated check should be reverted to accounts receivable. The minimum balance of 1'200,000 to he maintained in the current account is included in cash because the current account is unrestricted. The sinking fund is included in cash and cash equivalents because the bond payable is already due within one year from the end of the reporting period. The classification of a cash fund should parallel the classification of the related liability. The cash in bank restricted for plant addition is classified as noncurrent regardless of the expected year of disbursement.
Problem 5 On December 31, 2018, Roma Company reported cash of P9,950,000 with the following details:
Undeposited collections
600,000
Cash in bank – BDO checking account
4,000,000
Undeposited NDF Check received from customer, dated December 1, 2018
150,000
Undeposited check from a customer dated January 15,2019
250,000
Cash in Bank – BDO fund for payroll
1,000,000
Cash in bank – BDO money market instrument, 90 days
2,000,000
Cash in foreign bank restricted
1,500,000
Cash in bank – BDO value added tax account
450,000
Total
9,950,000
On December 31 2018 what total amount should be reported as cash and cash equivalents? a) 7,600,000 b) 8,200,000 c) 6,050,000 d) 8,050,000
Solution: D Undeposited collections
600,000
BDO checking account
4,000,000
BDO payroll fund
1,000,000
BDO Money market
2,000,000
BDO Value added tax account
450,000
Total cash and cash equivalents
8,050,000
The NSF customer check and postdated customer check dated January 15, 2019 should be reverted to accounts receivable. The restricted cash in foreign bank is classified as noncurrent. Problem 6 Timex Company reported petty cash fund which comprised the following: Coins and Currency
3,300
Paid Vouchers: Transportation
600
Gasoline
400
Office Supplies
500
Postage stamps
300
Due from employees
1,200
Manager’s check returned by bank marked “NSF”
3,000 1,000
Check drawn by the entity to the order of petty cash custodian 2,700 What is the correct amount of petty cash fund for statement presentation purposes? a) 10,000 b) 7,000 c) 6,000 d) 9,000 Solution: C Coins and Currency
3,300
Check drawn by the entity to the order of petty cash custodian 2,700 Correct amount of petty cash
6,000
Problem 7 On December 31, 2018, Erika Company reported cash accounts balance per ledger of P9,500,000 included the following: Cash in bank- demand deposit
3,000,000
Time deposit – 30 days
500,000
NSF check of customer
200,000
Money market placement due on June 30, 2019
2,000,000
Saving deposit
1,000,000
IOU from an employee
300,000
Pension fund
1,500,000
Customer check dated January 31, 2019
600,000
Customer check outstanding for 18 months
400,000 9,500,000
Check of P100,000 in payment of accounts payable was dated and recorded on December 31, 2018 but mailed to creditors on January 15, 2019.
Check of P300,000 dated January 31,2019 in payment of accounts payable was recorded and mailed December 31, 2018.
The cash receipts journal was held open until January 25,2019, during which time P200,000 was collected and recorded on December 31,2018.
What total amount should be reported as cash and cash equivalents on December 31, 2018? a) 4,700,000 b) 6,700,000 c) 4,900,000 d) 5,100,000
Solution: A Cash in bank – demand deposit
3,200,000
Time deposit – 30 days
500,000
Savings deposit
1,000,000
Total cash and cash equivalents
4,700,000
Cash in bank – demand deposit
3,000,000
Undelivered check dated and recorded on
100,000
December 31 2018 but mailed on January 31, 2019 Check postdated January 31 2019 recorded on Dec 31 2018
300,000
Collections during January 2019 recorded on Dec 31 2018
(200,000)
Adjusted cash in bank
3,200,000
The undelivered check and postdated check should be restored to cash by debiting cash in bank and crediting accounts payable. The window dressing of collections during January 2019 should be reversed by debiting accounts receivable and crediting cash in bank The NSF customer check, postdated customer check dated January 31, 2019 and the customer check outstanding for 18 months should be reverted to accounts receivable. The money market placement is not a cash equivalent because the term is more than 3 months. The pension fund is a noncurrent investment.
Problem 8 Liwanag Company reported an imprest petty cash fund of P50,000 with the following details: Currencies
20,000
Coins
2,000
Petty cash vouchers: Gasoline payments for delivery equipment
3,000
Medical supplies for employees
1,000
Repair of office equipment
1,500
Loans to employees
3,500
A check drawn by the entity payable to the order of Grace de la cruz, petty cash custodian, representing her salary
15,000
An employee check returned by the bank for insufficiency of fund
3,000
A sheet of paper with names of several employees together with contribution for a birthday gift of a co-employee attached to the sheet of paper is a currency of
5,000
What amount of petty cash fund should be reported in the statement of financial position? a) 42,000 b) 27,000 c) 37,000 d) 22,000
Solution: C Currencies
20,000
Coins
2,000
Check drawn to the order of the petty cash custodian
15,000 37,000
The check drawn payable to the order of the petty cash custodian representing her salary is actually an accommodation check. Thus, the amount is included as part of cash.
Problem 9 Karla Company provided the following information on December 31, 2018: Cash on hand
500,000
Security Bank current account
1,000,000
PNB Current account No. 1
400,000
PNB Current account No. 2 (overdraft)
(50,000)
BSP treasury bill – 60 days
3,000,000
The cash on hand included a customer postdated check of P100,000 and postal money order of P40,000.
A check for P200,000 in payment of account was drawn against Security Bank account, dated January 15, 2019, delivered to the payee and recorded December 31, 2018.
What total amount of cash and cash equivalents should be reported on December 31,2018? a) 4,550,000 b) 5,050,000 c) 4,750,000 d) 1,950,000
Solution: A Cash on hand (500,000-100,000 postdated check)
400,000
Security Bank current account (1,000,000+200,000)
1,200,000
PNB current account No. 1
400,000
PNB current account No. 2
(50,000)
BSP treasury bill – 60 days
3,000,000
Total cash and cash equivalents
4,950,000
The bank overdraft is netted because it is in the same bank. The postal money order is part of cash. The postdated check delivered of P200,000 drawn against security bank is restored to cash in bank by debiting cash in bank and crediting accounts payable.
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