Financial Accounting: Components of Cash

PROBLEM 1:

ABC Company shows the following account balances in their financial records as of December 31, 2020:

Checking account at Morg bank (20,000); Checking account at Land bank, 2,000,000; Payroll Account- National Bank 400,000; Foreign bank account-restricted, 750,000; Postage stamps, 22,000; Employees’ postdated checks, 30,000; IOU from president’s brother, 75,000; Traveler’s check 200,000; No-sufficient funds check, 18,000; Petty cash fund (14,000 in currency and expenses and receipts for 84,000); 98,000 and Cashier’s checks, 50,000.

What is the correct cash balance to be reported in the balance sheet of Lipton Company on December 31, 2020?

Checking Account at Land bank, 2,000,000

Payroll Account- National Bank 400,000

Traveler’s check 200,000

Petty Cash Fund 14,000

Cashier’s Checks 50,000

Cash 2,664,000

The negative balance of checking account at Morg bank should be treated as payables. The cash for foreign bank account is excluded because it is restricted. Postage stamps are considered supplies and not cash. Employee’s postdated checks cannot yet be considered as cash until the “post-date” has arrived. Thus, it is also excluded. The IOU is a receivable account from the president’s brother. The NSF check stands for “no sufficient fund”, which means that the bank balance for the paying bank account is not enough to shoulder the funds. Lastly, only the currency part of 14,000 in the petty cash shall be considered as cash.

PROBLEM 2:

Cash in bank       6,000,000

Petty Cash Fund, all funds were reimbursed on December 31, 2019         50,000

Money market placement or commercial papers                                              1,000,000

Saving deposit                                                                                                   700,000

Cash in bank included 200,000 of compensating balance against short-term borrowing arrangement on December 31, 2020. The compensating balance is legally restricted as to withdrawal. A check of 800,000 dated January 31, 2021 in payment of accounts payable was recorded and mailed on December 31, 2020. What amount should be reported as cash and cash equivalents on December 31, 2020?

Cash in bank 6,000,000

Petty cash funds 50,000

Money market placements 1,000,000

Saving deposit 700,000

Less: Compensating Balance 200,000

Add: Postdated check issued 800,000

Cash and Cash Equivalents 8,350,000

Since the compensating balance is restricted, it should be excluded from cash. Initially, the company also reduced cash due to a post-dated check worth 800,000. It is a post-dated because the check is dated on 2020, which is beyond the current financial reporting period. Thus, it should be added back and included in cash.

PROBLEM 3:

On December 31, 2017, EverJake Company has the following composition of its cash and cash equivalents:

Demand deposit, 1,500,000

Certificate of Deposit- 30 days 500,000

NSF Check of customer, P20,000

Money market placement (due date: June 30, 2018), P1,000,000

Savings deposit in closed bank 50,000

IOU from an employee, P30,000

Petty cash fund, P10,000

Customer’s check dated January 31, 2018 60,000

Customer’s check outstanding for 18 months, 30,000

Additional information:

• Check of 100,000 in payment of accounts payable was recorded on December 31, 2020 but mailed to creditors on January 15, 2021
• Check of 50,000 dated January 31, 2021 in payment of accounts payable was not recorded and mailed December 31, 2020.
• The company uses the calendar year. The cash receipts journal was held open until January 15, 2021, during which time, P200,000 was collected and recorded on December 31, 2020.

How much is “cash and cash equivalents” should be shown on the December 31, 2020 balance sheet?

Demand Deposit 1,500,000

Certificate of deposit 500,000

Petty cash fund 10,000

Add: Check in Accounts Payable 100,000

Less: Error in cash receipts journal 200,000

Cash and Cash equivalents 1,910,000

The NSF Check of customer is excluded because the company is not able to collect the cash from the bank account because it has “no sufficient funds.” The money market is also due for more than 3 months, so it will be considered as a short term investment rather than part of cash equivalents. IOUs from employees are presented as receivables. The customer’s check dated January 31, 2018 is a post dated check, and should be excluded from cash since the company can not utilize the amount until next year. The other customer’s check outstanding for 18 months is a stale check because it has been outstanding for more than 1 year.

Moreover, the check in payment of accounts payable was erroneously recorded as 2020 disbursements although it is dated for 2021. As such, it should be added back to the bank balance. The second check dated January 31, 2021 shall also not affect the 2020 cash balance; however, no adjustment shall be made because it was not recorded. Lastly, the company erroneously recorded a 2021 cash receipt as part of 2020 cash receipts, so cash should be reduced for such amount.