CHAPTER 6

Cash and Cash Equivalents

Questions
Q6-1.

Cash is the medium of exchange; it is used to express most accounting

measurements. Cash includes currency, balances in checking accounts, and
negotiable instruments that are accepted by banks for immediate deposit and
withdrawal.

Q6-2.

A compensating balance occurs when a bank makes a loan and requires the
borrower to maintain a minimum portion of the loan amount in the borrowers
checking account. It effectively limits a portion of the loan proceeds that are
available to the borrower and also causes the true interest rate to be higher
than specified on the related loan agreement. Compensating balances should
be reported on the statement of financial position, or in a note to the financial
statements.

Q6-3.

To recognize the expenses (represented by disbursements) and the reduction in

cash, which occurred since the last reimbursement. If the fund is not
replenished, cash is overstated and expenses are understated.

Q6-4.

Exclude from Cash: (b) post-dated checks; (d) postage stamps; and (g)
certificates of deposit.

Q6-5.

a.
b.
c.
d.
e.
f.
g.

Q6-6.

The basic purposes of a bank reconciliation are:

Q6-7.

Enter under balance from company cash account, June 30. Addition.
Enter under balance from bank statement, June 30. Deduction.
Enter under balance from bank statement, June 30. Addition.
Enter under balance from company cash account, June 30. Deduction.
Enter under balance from bank statement, June 30. Addition.
Enter under balance from company cash account, June 30. Deduction.
Enter under balance from company cash account, June 30. Addition.

a.
b.
c.

Control reconciles bank balance with book balance.

Reporting establishes correct ending cash balance.
Entries provide data needed to update the cash account.

a.

Deposits in-transit deposits transmitted to the bank by a depositor, but

not yet reflected on the bank statement.
Checks outstanding checks written, recorded, and distributed that have

b.

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c.
d.
e.

not yet cleared the issuers bank.

NSF check a check returned by the makers bank marked nonsufficient funds.
Correct cash balance the true, up-to-date, fully reconciled balance of
cash; reported on the statement of financial position.
Cash short less actual cash than reported in the Cash account. Cash
over more actual cash than reported in the Cash account.

Q6-8.

A compensating balance is that portion of any cash deposit maintained by an

enterprise which constitutes support for existing borrowing arrangements 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 non-current borrowing arrangements should be separately classified as a
non-current asset in either the investments or other assets section.

Q6-9.

Restricted cash for debt redemption would be reported in the non-current 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 non-current.

Matching Type
MT6-1.

1.
2.

E
D

3.
4.

E
A

MT6-2.

1.
2.
3.
4.

C
A
C
C

5.
6.
7.
8.

B
B
D
B

MT6-3.

1.
2.
3.
4.
5.

E
N
C
I
F

6.
7.
8.
9.
10.

D
G
M
H
A

5.
6.

B
C

11.
12.
13.
14.

B
J
K
L

Cash and Cash Equivalents

6-3

Exercises
E6-1.

Requirement 1
(1)

Reconciled balance in Equitable-PCI Bank

checking account
(3)
Balance in Metropolitan Bank savings account
(5)
Petty cash fund
(9)
Cash on hand (undeposited sales receipts)
(10)
Travelers checks
Cash balance reported on statement of financial position

P 19,607.50
287,500.00
5,000.00
31,094.00
6,000.00
P349,201.50

Requirement 2
(2)
(4)
(6)
(7)
(8)
(11)
E6-2.

2014
Jan.

2
31

Reconciled negative balance in Bank of the Philippines Islands

checking account current liability
Certificate of deposit short-term temporary investments
Postage stamps prepaid expenses
Employees IOU not readily negotiable, therefore receivable
Employees travel advances prepaid expenses
Customers postdated check receivable

Petty Cash
Cash

6,000.00

Postage Expense
Office Supplies Expense
Miscellaneous Expense
Cash Short and Over*
Cash

2,504.00
1,659.00
1,190.50
73.00

* P6,000.00 Beginning balance

Disbursements from
(5,353.50) petty cash #
P 646.50 Petty cash balance, 1/31/03
#

E6-3.

6,000.00

5,426.50
* P 573.50 Actual amount in petty cash
Petty cash balance,
(646.50) 1/31/03
P (73.00) Cash short and over

P2,504.00 + P1,659.00 + P1,190.50

Requirement 1
Balance from bank statement
Add: Deposit in transit
NSF check returned

P13,425.00
P3,294.20
2,126.00

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Bank service charge

Deduct: Note collected by bank

Interest on note
Outstanding checks
Unadjusted cash balance per books

128.50

P6,000.00
250.00
6,847.00

5,548.70
P18,973.70

(13,097.00)
P 5,876.70

Requirement 2
NATIONAL CORPORATION
Bank Reconciliation
August 31, 2014
Balance from bank statement
Add: Deposit in transit

P13,425.00
3,294.20
P16,719.20
(6,847.00)
P 9,872.20

Deduct: Outstanding checks

Adjusted cash balance
Balance from company records
(see Requirement 1)
Add: Note collected by bank
Interest on note

Deduct: Bank service charge

NSF check returned
Adjusted cash balance

P 5,876.70
P6,000.00
250.00

P 128.50
2,126.00

6,250.00
P12,126.70

(2,254.50)
P 9,872.20

Requirement 3
2014
Aug. 31

31

E6-4.

Cash
Notes Receivable
Interest Revenue

6,250.00

Accounts Receivable (NSF check)

Miscellaneous Expense (bank
service charge)
Cash

2,126.00

Requirement 1

6,000.00
250.00

128.50
2,254.50

Cash and Cash Equivalents

6-5

OPIUM CORPORATION
Bank Reconciliation
March 31, 2014
Balance from bank statement
Add: Undeposited cash
Deposit in transit
Deduct: Outstanding checks
# 429
# 432
# 433
# 434
Adjusted cash balance
Balance from company records
Add: Note collected by bank
Interest on note
Deduct: Bank service charge
Returned NSF check
Check incorrectly recorded
Adjusted cash balance
2014
Mar. 31
31

E6-5.

Cash
Notes Receivable
Interest Revenue
Miscellaneous Expense (bank
service charge)
Accounts Receivable (NSF check)
Accounts Receivable (error
correction)
Cash

P181,123.50
P7,245.00
9,517.50

P 574.00
1,475.00
2,148.00
191.90

Less: Outstanding checks

(6,116.00)
P191,770.00
P173,108.00

P20,000.00
1,000.00
P 150.00
1,738.00
450.00

21,000.00
P194,108.00

(2,338.00)
P191,770.00

21,000.00
20,000.00
1,000.00
150.00
1,738.00
450.00
2,338.00

Cash balance, per books, June 30, 2014

Add: Credit by bank
Adjusted cash balance (on hand and in bank)
Less adjusted bank balance:
Bank balance, June 30, 2014

16,762.50
P197,886.00

P 365,020
2,000
P 367,020
P 300,120

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# 62
# 183
# 284
#8621
#8623
#8632

P2,320
3,000
5,060
3,820
5,500
2,900

22,600

Cash which should be on hand for deposit

Cash reported
Amount of theft

277,520
P 89,500
75,120
P 14,380

The cashier removed P14,380 and attempted to conceal the theft by:
1) Not listing all outstanding checks. Cashier omitted P10,380.
2) Underfooting outstanding checks shown on the reconciliation by P2,000.
3) Subtracting a P2,000 item from the bank balance that should be added to
the book balance.
E6-6.

Checks clearing bank in May

Checks outstanding from April
May checks clearing in May
Checks written during May
Outstanding checks at end of May

E6-7.

Requirement (a)

P14,500
(1,000)
P13,500
15,000
P 1,500

Books
Bank
Balance, Oct. 31
14,500 Balance, Oct. 31
11,520
Add:
Add:
Note collected
1,000
Cash on hand
510
Interest
100 1,100
Deposits in transit* 10,000 10,510
Deduct:
NSF (bad check retd) 50
Bank service charge
30
Cash overage
Correct cash balance

Deduct:
Outstanding
(80)
checks **
(10)
15,530 Correct cash balance

* P30,000 + P1,400 P21,400 = P10,000 deposits in transit.

** P26,500 + P900 P20,900 = P6,500 outstanding checks.
Requirement (b)

(6,500)

15,530

Cash and Cash Equivalents

6-7

Entries:
(1) Cash
Note receivable
Interest revenue

1,100
1,000
100

(2) Special accounts receivable, NSF checks

Cash

50

(3) Expense, bank service charge

Cash

30

(4) Cash overage

Cash

10

50
30
10

Multiple Choice Questions

MC6 - 1.
2.
3.
4.
5.

B
D
D
C
A

MC6 -11.
12.
13.
14.
15.

D
B
B
B
B

MC6 -21.
22.
23.
24.
25.

B
A
C
D
C

6.
7.
8.
9.
10.

A
D
D
B
A

16.
17.
18.
19.
20.

C
A
A
C
C

26.
27.
28.
29.
30.

B
A
B
D
B

MC6-31.
32.
33.
34.

A
C
C
A