Cash and Cash Equivalents

Question 1

66.On October 31, Dingo, Inc. had cash accounts at three different banks. One account balance is segregated solely for a November 15 payment into a bond sinking fund. A second account, used for branch operations, is overdrawn. The third account, used for regular corporate operations, has a positive balance.

How should these accounts be reported in Dingo’s October 31 classified balance sheet?

The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.

• The segregated and regular accounts should be reported as current assets, and the overdraft should be reported as a current liability.
• The segregated account should be reported as a noncurrent asset, and the regular account should be reported as a current asset net of the overdraft.
• The segregated and regular accounts should be reported as current assets net of the overdraft.

Answer 1

A:
The segregated account should be reported as a noncurrent asset, the regular account should be reported as a current asset, and the overdraft should be reported as a current liability.

Explanation: The accounts are with different banks. Thus, the accounts cannot be offset against one another.

The overdraft is a liability because the bank honored a check or withdrawal causing the account to be negative. The firm owes the bank this amount.

The regular corporate account is part of the cash account, a current asset. The segregated account is a long-term investment. The cash in this asset is set aside for a specific purpose. There is no intent to use the cash for ordinary operating purposes.

Question 2

66. 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 one month from balance sheet date 250
Petty cash 200
Commercial paper (matures in two months) 7,000
Certificate of deposit (matures in six months) 5,000

What amount should be reported as cash and cash equivalents on Smite’s balance sheet?

Answer 2

A: $27,200

Note: the postdated check is neither cash nor cash equivalent. The item should be treated as a receivable. It is not cash until the date written on the check.

a post dated check is a check written by the drawer (payer) for a date in the future. Whether a post-dated cheque may be cashed or deposited before the date written on it depends on the country

Question 3

66. What is excluded from cash?

Answer 3

certificates of deposit, legally restricted compensating balances, restricted cash balances

note on CD’s…if problem specifies that maturity is 90 days or less than it can be included in cash and cash equivalents.