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Essay Questions
1. What is cash?
From the point of view of a layman, "cash" simply means money. Money is the standard
medium of exchange in business transactions which refers to the currency and coins which
are in circulation and legal tender. However, in the accounting parlance, the term "cash"
has a special and broader meaning. It connotes more than money. As contemplated in
accounting, cash includes "money and any other negotiable instrument that is payable in
money and acceptable by the bank for deposit and immediate credit". Accordingly, cash
includes checks, bank drafts and money orders because these are acceptable by the bank
for deposit or immediate encashment.
There is no specific standard dealing with "cash". The only guidance is found in PAS 1,
paragraph 66, which provides that "an entity shall classify an asset as current when it is
cash or a cash equivalent unless it is restricted from being exchanged or used to settle a
liability for at least twelve months after the end of reporting period." Accordingly, to be
reported as "cash" as a current asset, an item must be unrestricted in use. This means that
the cash must be readily available in the payment of current obligations and not be subject
to any restrictions, contractual or otherwise. Thus, unrestricted cash includes cash on hand,
cash in bank and cash fund set aside for current purposes.
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. PAS 7 further
states that "only highly liquid investments that are acquired three months before maturity
can qualify as cash equivalents".
Equity securities cannot qualify as cash equivalents because shares do-not have a maturity
date. However, preference shares with specified redemption date and acquired three
months before redemption date can qualify as cash equivalents.
Cash is valued at face value. Cash in foreign currency is valued at the current exchange
rate.
If a bank or financial institution holding the funds of the entity is in bankruptcy or financial
difficulty, cash should be written down to estimated realizable value if the amount
recoverable is estimated to be lower than the face value.
5. Explain the financial statement presentation and classification of cash and cash
equivalents.
The caption "cash and cash equivalents" should be shown as the first item among the
current assets. This caption includes all cash items, such as cash on hand, cash in bank,
petty cash fund and cash equivalents which are unrestricted in use for current operations.
However, the details comprising the "cash and cash equivalents" should be disclosed in the
notes to financial statements.
6. Explain the classification of investments in time deposit, money market instrument, and
treasury bills.
Investments in time deposit, money market instruments and treasury bills should be
classified as follows:
a. If the term is three months or less, such instruments are classified as cash equivalents
and therefore included in the caption "cash and cash equivalents".
b. If the term is more than three months but within one year, such investments are
classified as short-term or temporary investments and presented separately as current
assets.
c. If the term is more than one year, such investments are classified as long-term
investments. However, if such investments become due within one year from the end of
the reporting period, they are reclassified as temporary investments.
Cash in foreign currency shall be translated to Philippine pesos using the current exchange
rate.
8. Explain the classification of a cash fund set aside for a certain purpose.
If the cash fund is set aside for use in current operations, it is a current asset. It is included
as part of cash and cash equivalents. Examples of such fund are petty cash fund, payroll
fund, travel fund, interest fund, dividend fund and tax fund. On the other hand, if the cash
fund is set aside for noncurrent purposes, it is shown as long-term investment. Examples
of such fund are sinking fund, preferred redemption fund, contingent fund, insurance fund
and fund for acquisition or construction of property, plant and equipment. Classification of a
cash fund as current or noncurrent should parallel the classification of the related liability.
When the cash in bank account has a credit balance, it is said to be an overdraft. The
credit balance in the cash in bank 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.
However, when the entity maintains two or more accounts in one bank and one account
results in an overdraft, such overdraft may be offset against the other bank account with a
debit balance. Moreover, an overdraft may also be offset against the other bank account if
the amount is not material.
10. What is a compensating balance? Explain the classification in the statement of financial
position.
A compensating balance is the minimum checking or demand deposit account balance that
must be maintained in connection with a borrowing arrangement with a bank.
For example, an entity borrows P2,000,000 from a bank and agrees to maintain 10%
compensating balance or P200,000 in a current or checking account.
In effect, this arrangement results in the reduction of the amount borrowed because the
compensating balance provides a source of funds to the bank as partial compensation for
the loan extended.
In many instances and in accordance with normal banking practices, deposits are not
legally restricted because most often compensating balance agreements are informal and
therefore not legally binding. The amount and nature of such agreements whether legally
or not legally restricted shall be fully disclosed in the notes to financial statements.
12. What is the meaning of undelivered check? Postdated check? Stale check?
An undelivered or unreleased check is one that is merely drawn and recorded but not given
to the payee before the end of reporting period. The unreleased check shall not be treated
as outstanding check. Accordingly, the original entry for the payment shall be reversed so
as to restore the cash balance and the related liability account.
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 reversed and therefore restored to the cash
balance.
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. Thus, even after three months, the
entity may issue a "stop payment order" to the bank for the cancelation of the stale check.
The stale check previously issued by an entity shall also be restored to the cash balance.
Window dressing is a practice of opening the books of accounts beyond the close of the
accounting period for the purpose of showing a better financial position and performance.
a. By recording as of the last day of the accounting period collections made subsequent
to the close of the period.
b. By recording as of the last day of the accounting period payments of accounts made
subsequent to the close of the period.
Lapping consists of misappropriating a collection from one customer and concealing this
defalcation when collection is made from another customer.
Kiting is a transfer of cash from one bank to another bank. Kiting is usually employed at the
end of the month. Kiting occurs when a check is drawn against a first bank and depositing
the same check in a second bank to cover the shortage in the latter bank.
The imprest system is an internal control device for cash which requires that all cash
receipts should be deposited intact and all cash payments should be made by means of
check. Small disbursements are paid out of the petty cash fund.
15. What are the two systems of handling petty cash fund? Explain briefly.
1. Imprest fund system - Pretty cash expenses are recorded upon replenishment. The
amount of the replenishment is normally equal to the petty cash disbursements.
2. Fluctuating fund system — Petty cash expenses are immediately recorded. The
amount of replenishment may be equal to, more or less than, the petty cash
disbursements.
A bank reconciliation is a statement which brings into agreement the cash balance per book
and cash balance per bank. It is usually prepared monthly because the bank provides the
depositor with the bank statement at the end of every month.
A bank statement is a monthly report of the bank to the depositor showing the cash balance
per bank at the beginning, the deposits acknowledged, the checks paid, other charges and
credits and the daily cash balance per bank during the month. Actually, the bank statement
is an exact copy of the depositor's ledger in the records of the bank.
Credit memos refer to items not representing deposits credited by the bank to the account
of the depositor but not yet recorded by the depositor as cash receipts. They have the effect
of increasing the bank balance. Typical examples of credit memos are note collected by
bank in favor of the depositor and proceeds of bank loan credited to the account of the
depositor.
Debit memos refer to items not representing checks paid by bank which are charged or
debited by the bank to the account of the depositor but not yet recorded by the depositor as
cash disbursements. They have the effect of decreasing the bank balance.
Typical examples of debit memos are NSF checks and bank service charges.
Deposits in transit are collections already recorded by the depositor as cash receipts but
not yet reflected on the bank statement.
Outstanding checks are checks already recorded by the depositor as cash disbursements
but not yet reflected on the bank statement. Outstanding checks include:
a. Checks drawn and already given to payees but not yet presented for payment.
b. Certified checks - A certified check is one where the bank has stamped on its face the
word "accepted" or "certified" indicating sufficiency of fund.
When the bank certifies a check, the account of the depositor is immediately debited or
charged to insure the eventual payment of the check.
Certified checks should be deducted from the total outstanding checks (if included therein)
because they are no longer outstanding for bank reconciliation purposes.
1. Adjusted balance method - Under this method, the book balance and the bank balance
are brought to a correct cash balance that must appear on the balance sheet.
2. Book to bank method - Under this method, the book balance is reconciled with the
bank balance or the book balance is adjusted to equal the bank balance.
3. Bank to book method - Under this method, the bank balance is reconciled with the
book balance or the bank balance is adjusted to equal the book balance.
Cash
1. Which of the following is usually considered cash?
A. Certificate of deposit C. Money market saving certificate
B. Checking account D. Postdated check FA © 2014
2. Which of the following shall not be considered cash for financial reporting purposes?
A. Coin and currency C. Money orders
B. IOUs D. Petty cash fund FA © 2014
6. At the end of the current year, an entity had various checks and papers in the safe. Which
of the following should not be included in "cash" in the current year-end statement of
financial position?
A. US $20,000 cash.
B. Past due promissory note issued in favor of the entity by the President.
C. The entity's undelivered check payable to a supplier dated December 31 of the current
year.
D. Another entity's P150,000 check payable to the entity dated December 15 of the
current year. FA © 2014
Cash equivalent
7. A cash equivalent is a short-term, highly liquid investment that is readily convertible into
known amount of cash and
A. Is acceptable as a means to pay current liabilities.
B. Has a current market value that is greater than the original cost.
C. Is so near maturity that it presents insignificant risk of change in interest rate.
10. Which of the following should be excluded from cash and cash equivalents?
A. Time deposit which matures in one year.
B. A customer's check denominated in a foreign currency.
C. The minimum cash balance in the current account which is maintained to avoid service
charge.
D. A check issued by the entity on December 27 of the current year but dated January 15
of next year. FA © 2014
11. All of the following can be classified as cash and cash equivalents, except?
A. A bank overdraft
B. Equity investments
C. Commercial papers held and due for repayment in 90 days
D. Redeemable preference shares acquired and due in 60 days FA © 2014
18. The petty cash fund account under the imprest fund system is debited
A. Only when the fund is created.
B. When the fund is created and everytime it is replenished.
C. When the fund is created and when the fund is decreased.
D. When the fund is created and when the size of the fund is increased. FA © 2014
21. When a petty cash fund is used, which of the following statements is true?
A. The reimbursement of the petty cash fund should be credited to the cash account.
B. The balance of the petty cash fund should be reported in the statement of financial
position as a long-term investment.
C. The petty cashier's summary of petty cash payments serves as a journal entry that is
posted to the appropriate general ledger account.
D. Entries that include a credit to the cash account should be recorded at the time the
payments from the petty cash fund are made. FA © 2014
23. Which of the following statements in relation to the cash short or over account is true?
A. It would be impossible to have cash shortage or overage if employees were paid in
cash rather than by check.
B. If the cash short or over account has a debit balance at the end of the period it must be
debited to an expense account.
C. The entry to account for daily cash sales for which a small amount of cash shortage
existed would include a debit to cash short or over account.
D. A credit balance in a cash short or over account should be considered a liability
because the short changed customer will demand return of this amount. FA © 2014
24. Which of the following statements in relation to petty cash fund is false?
27. Under which classification is cash restricted for plant expansion reported?
A. Current assets C. Equity
B. Current liabilities D. Noncurrent assets FA © 2014
28. Bank overdraft generally should be
A. Reported as a current liability.
B. Reported as a deduction from cash.
C. Reported as a deduction from current assets.
D. Netted against cash and a net cash amount reported. FA © 2014
32. At the end of the current year, an entity had cash accounts at three different banks. One
account is segregated solely for 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?
A. The segregated and regular accounts should be reported as current assets net of the
overdraft
B. The segregated and regular accounts should be reported as current assets, and the
overdraft should be reported as a current Iiability
C. 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
D. 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 FA © 2014
Bank reconciliation
33. A bank reconciliation is
A. A merger of two banks that previously were competitors.
B. A statement sent by the bank to depositor on a monthly basis.
C. A formal financial statement that lists all of the bank account balances of an entity.
D. A schedule that accounts for the differences between an entity's cash balance as
shown in the bank statement and the cash balance shown in the general ledger. FA ©
2014
34. Bank statements provide information about all of the following, except
A. Bank charges for the period C. Errors made by the depositor
B. Checks cleared during the period D. NSF checks FA © 2014
35. Which of the following items must be added to the cash balance per ledger in preparing a
bank reconciliation which ends with adjusted cash balance?
A. Service charge
37. In preparing a bank reconciliation, interest paid by the bank on the account is FA © 2014
A. Added to the bank balance C. Subtracted from the bank balance
B. Added to the book balance D. Subtracted from the book balance
38. In preparing a monthly bank reconciliation, which of the following would be added to the
balance per bank statement to arrive at the correct cash balance?
A. Deposits in transit
B. Outstanding checks
C. Bank service charge
D. A customer's note collected by the bank on behalf of the depositor FA © 2014
39. Which of the following must be deducted from the bank statement balance in preparing a
bank reconciliation which ends with adjusted cash balance?
A. Certified check
B. Deposit in transit
C. Outstanding check
D. Reduction of loan charged to the account of the depositor FA © 2014
40. If the balance shown on an entity's bank statement is less than the correct cash balance
and neither the entity nor the bank has made any errors, there must be
A. Deposits in transit
B. Outstanding checks
C. Bank charges not yet recorded by the entity
D. Deposits credited by the bank but not yet recorded by the entity FA © 2014
41. If the cash balance shown on entity's accounting records is less than the correct cash
balance and neither the entity nor the bank has made any errors, there must be
A. Deposits in transit
B. Outstanding checks
42. Which of the following would not require an adjusting entry on the depositor's books?
A. Bank service charge
B. NSF check from customer FA © 2014
C. Deposit of another entity is credited by the bank to the account of the depositor
D. Check in payment of account payable as recorded by the depositor is overstated
44. Bank reconciliations are normally prepared on a monthly basis to identify adjustments
needed in the depositor's records and to identify bank errors. Adjustments on the part of the
depositor should be, recorded for
A. Outstanding checks and deposits in transit.
B. Bank errors, outstanding checks and deposits in transit.
C. Book errors, bank errors, deposits in transit and outstanding checks.
D. All items except bank errors, outstanding checks and deposits in transit. FA © 2014
Proof of cash
47. A proof of cash
A. Is a summary of cash receipts and cash payments.
B. Is a formal statement showing the total cash receipts during the year.
C. Is a physical count of currencies on hand at the end of reporting period. FA © 2014
D. Is a four-column bank reconciliation showing reconciliation of cash balances per book
and per bank at the beginning and end of the current month and reconciliation of cash
receipts and cash disbursements of the bank and the depositor during the current
month.
Unrestricted cash
7
. Islander Company provided the following information with respect to the cash and cash
equivalents on December 31,2014:
Checking account at First Bank (200,000)
Checking account at Second Bank 3,500,000
Treasury bonds 1,000,000
Payroll account 500,000
Value added tax account 400,000
Foreign bank account - unrestricted (in equivalent pesos) 2,000,000
Postage stamps 50,000
Employee's postdated check 300,000
IOU from president 750,000
Credit memo from a vendor for a purchase return 80,000
Traveler's check 300,000
Not-sufficient-fund check 150,000
Petty cash fund (P20,000 in currency and expense receipts for P30,000) 50,000
Money order 180,000
What amount should be reported as unrestricted cash on December 31, 2014?
A. 4,600,000 C. 5,900,000
B. 4,900,000 D. 6,900,000 P1 © 2014
Bank reconciliation
Adjusted cash balance
20
. Esteem Company provided the month-end bank statement which showed a balance
of P3,600,000. Outstanding checks amounted to PI,200,000, a deposit of P400,000
was in transit at month-end, and a check for P50,000 was erroneously charged by the
bank against the account. What amount should be reported as cash in bank at month-
end?
A. 2,050,000 C. 2,850,000
B. 2,750,000 D. 4,350,000 FA © 2014
21
. Gallant Company showed a cash account balance of P4,500,000. The bank
statement did not include a deposit of P230,000 made on the last day of the month.
The bank statement showed a collection by the bank of P94,000 and a customer
check for P32,000 returned because it was NSF. A customer check for P45,000 was
recorded on the books as P54,000, and a check written for P79,000 was recorded as
P97,000. What amount should be reported as cash in bank?
A. 4,571,000 C. 4,801,000
B. 4,765,000 D. 4,819,000 FA © 2014
22
. In preparing the August 31,2014 bank reconciliation, Apex Company provided the
following information:
Balance per bank statement 1,805,000
Deposit in transit 325,000
Return of customer's check for insufficient fund 60,000
Outstanding checks 275,000
Bank service charge for August 10,000
On August 31,2014, what is the adjusted cash in bank?
A. 1,755,000 C. 1,795,000
B. 1,785,000 D. 1,855,000 FA © 2014
23
. In preparing the bank reconciliation on December 31, 2014, Case Company
provided the following data:
Deposit in transit
37
. Kate Company shows a cash account balance per ledger of P1,652,000 at December
31. The bank statement, however, shows a balance of P2,090,000 at the same date.
The only reconciling items consist of a bank service charge of P2,000, a large number
of outstanding checks totaling P590,000 and a deposit in transit. What is the deposit in
transit in the December 31 bank reconciliation?
A. 150,000 C. 440,000
B. 154,000 D. 592,000 P1 © 2014
Outstanding checks
38
. Grass Company provided the following information:
Balance per bank statement July 31 1,240,000
Balance per ledger, July 31 750,000
Deposit of July 30 not recorded by bank 280,000
Debit memo - service charges 10,000
Credit memo - collection of note by bank for Grass 300,000
Outstanding checks ?
An analysis of the canceled checks returned with the bank statement reveals the
following:
* Check for purchase of supplies was drawn for P60,000 but was recorded as
P90,000.
* The manager wrote a check for traveling expenses of P100,000 while out of
39
. Bayside Company provided the following information for October and November 2014:
Checks and charges recorded by bank in November, including
a November service charge of P4,000 and NSF check of P20,000 550,000
Service charge made by bank in October and
recorded by depositor in November 2,000
Total credits to cash in all journals during November 620,000
Customer NSF check returned in October and redeposited in November
(no entry made by depositor in either October or November) 40,000
Outstanding checks on October 31, 2014 that cleared in November 230,000
What is the amount of outstanding checks on November 30,2014?
A. 282,000 C. 302,000
B. 300,000 D. 322,000 P1 © 2014
Journal entries
40
. Margar Company kept all cash in a checking account. An examination of the
accounting records and bank statement for the month ended December 31,2014
revealed a bank statement balance of P8,469,000 and a book balance of P8,524,000.
A deposit of P950,000 placed in the bank's night depository on December 29 does not
appear on the bank statement. Checks outstanding on December 31 amount to
P270,000.
The bank statement showed that on December 25 the bank collected a note for Margar
Company and credited the proceeds of P935,000 to the entity's account which included
P35,000 interest.
Margar Company discovered that a check written in December for P183,000 in
payment of an account had been recorded as PI 38,000.
Included with the December 31 bank statement was an NSF check for P250,000 that
Margar Company had received from a customer on December 20. The bank statement
showed a P15,000 service charge for December.
What is the journal entry to adjust the cash in bank on December 31 ? P1 © 2014
A. Debit to cash in bank of P935,000 C. Net debit to cash in bank of P625,000
Proof of Cash
41
. Oro Company had the following bank reconciliation on March 31 of the current year:
Balance per bank statement, March 31 4,650,000
Add: Deposits in transit 1,000,000
Total 5,65,0,000
Less: Outstanding checks 1,250,000
Balance per book, March 31 4,400,000
Data per bank statement for the month of April follow:
Deposits 6,000,000
Disbursements 5,000,000
All reconciliation items on March 31 cleared through the bank in April. Outstanding checks on
April 30 totaled P750,000 and deposits in transit amounted to PI,500,000. What is the
amount of cash receipts per book in April?
A. 5,000,000 C. 6,500,000
B. 5,500,000 D. 7,500,000
The bank statement for the month of July showed the following:
Deposits (including P200,000 note collected for Lazer) 9,000,000
Disbursements (including P 140,000 NSF check and
P10,000 service charge) 7,000,000
All reconciling items on June 30 cleared through the bank in July. The outstanding checks totaled
P600,000 and the deposit in transit amounted to P1,000,000 on July31.
44
. What is the cash balance per book on July 31?
A. 4,500,000 C. 5,400,000
B. 5,350,000 D. 5,550,000
45
. What is the amount of cash receipts per book in July?
A. 8,600,000 C. 9,600,000
B. 9,400,000 D. 9,800,000
46
. What is the amount of cash disbursements per book in July?
A. 6,550,000 C. 6,850,000
B. 6,700,000 D. 7,300,000
2
.Answer is (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, it is included as part of cash.
3
.Answer is (B).
Checkbook balance 4,000,000
Undelivered check drawn on Thor's account 500,000
Adjusted cash balance 4,500,000
The undelivered check is restored to the cash balance by debiting cash and crediting accounts payable. The cash in
sinking is a noncurrent investment because it is set aside for the payment of noncurrent liability.
4
.Answer is (B).
Cash on hand 500,000
Demand deposit 4,000,000
Petty cash fund 50,000
Traveler's check 200,000
Manager's check 100,000
Money order 150,000
Total cash 5,000,000
The certificate of deposit is a cash equivalent. The postdated customer check is reverted to accounts receivable.
5
.Answer is (A).
Petty cash fund 24,000
Undeposited receipts (1,220,000-70,000) 1,150,000
Cash in Allied bank (2,245,000-40,000) 2,205,000
3,379,000
The postdated customer check of P70,000 should be reverted to accounts receivable. The outstanding check of
P40,000 is deducted from the Cash in Allied Bank because the cash balance is per bank statement. The bond sinking
fund is a noncurrent investment. The vouchers paid should be recorded as expenses. The IOUs should be shown as
advances to employees.
6
.Answer is (D).
Checkbook balance 4,000,000
Postdated customer check ( 200,000)
Undelivered check payable to supplier 400,000
Adjusted cash in bank 4,200,000
Petty cash:
Coins and currencies 5,000
Replenishment check 43,000 48,000
Total 4,248,000
The return value of the soft drink bottles is shown as refundable deposit as a current asset. The NSF check is
redeposited and cleared before December 31,2014. Thus, the same is not deducted anymore from the checkbook
balance.
7
.Answer is (D).
Checking account at Second Bank 3,500,000
Payroll account 500,000
Value added tax account 400,000
Foreign bank account - unrestricted 2,000,000
Traveler's check 300,000
Petty cash fund 20,000
Money order 180,000
Total unrestricted cash 6,900,000
8
.Answer is (B).
Cash in bank (1,800,000 - 600,000) 1,200,000
Petty cash fund 50,000
Time deposit 250,000
Total cash 1,500,000
Since the compensating balance is legally restricted, it is excluded from the amount shown as cash. In this case, the
compensating balance is shown as "cash held as compensating balance" as a current asset because the related loan
is short-term. The problem is silent on the term of the time deposit. It is assumed that the term is three months or less,
this being the normal banking practice. Accordingly, the time deposit is a cash equivalent.
9
.Answer is (C).
Cash in bank - current account 5,000,000
Cash in bank - payroll account 1,000,000
Cash on hand (500,000 - 200,000) 300,000
Time deposit 2,000,000
Total cash and cash equivalents 8,300,000
The cash in bank set aside for payroll is included in cash because it is for the payment of current liability.
The cash on hand is reduced by the postdated check payable to Pygmalion. The postdated check should be reverted
to accounts receivable.
The time deposit is classified as cash equivalent because the term is three months. Under PAS 7, treasury bills, money
market placement and time deposit normally qualify as cash equivalents only when they have a short maturity of three
months or less from the date of acquisition.
The cash in bank restricted for building construction is classified as a noncurrent investment because it is set aside for
the acquisition of a noncurrent asset and not for the payment of a current liability.
10
.Answer is (C).
Government treasury bills 2,000,000
Cash 3,400,000
Commercial papers 1,500,000
Total cash and cash equivalents 6,900,000
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. Since the remaining term is three
months from the date of acquisition, the commercial papers are considered cash equivalents.
11
.Answer is (D).
Undeposited collections 60,000
PCIB checking account 500,000
PCIB payroll fund 150,000
PCIB saving deposit 100,000
PCIB money market 2,000,000
Total cash and cash equivalents 2,810,000
The PNB overdraft is a current liability. The NSF check and the postdated check dated January 15, 2015 should be
reverted to accounts receivable. The restricted cash in foreign bank is classified as noncurrent.
12
.Answer is (D).
Petty cash fund (50,000 - 15,000) 35,000
Current account 4,000,000
Sinking fund 2,000,000
Cash on hand (500,000 - 100,000) 400,000
Treasury bills 1,000,000
Total cash and cash equivalents 7,435,000
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.
13
.Answer is (C).
Petty cash fund (50,000 - 15,000 - 5,000) 30,000
Current account - First Bank (4,000,000 + 100,000) 4,100,000
Money market placement 1,000,000
Total cash and cash equivalents 5,130,000
In the absence of specific term, money market placement, time deposit and treasury bills are short-term investment of
three months or less and therefore qualify as cash equivalents. The Fourth Bank time deposit is a noncurrent asset
because it is set aside for the acquisition of a noncurrent asset.
14
.Answer is (C).
Cash on hand (500,000 - 100,000) 400,000
Petty cash fund 20,000
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 4,970,000
The BPI time deposit is noncurrent because it is set aside for the acquisition of equipment.
15
.Answer is (D).
Demand deposit (1,500,000 + 100,000 + 50,000 - 200,000) 1,450,000
Time deposit - 3 0 days 500,000
Saving deposit 50,000
Petty cash fund 10,000
* Total cash and cash equivalents 2,010,000
16
.Answer is (B).
Cash on hand (200,000 - 30,000) 170,000
Petty cash fund 20,000
Philippine Bank current (5,000,000 + 25,000 + 45,000) 5,070,000
Manila Bank current 4,000,000
Asia Bank time deposit 2,000,000
Total cash and cash equivalents 11,260,000
17
.Answer is (C).
Cash in bank 2,250,000
Cash on hand 125,000
Total cash 2,375,000
A compensating balance is a minimum checking or demand deposit account balance that must be maintained in
connection with a borrowing arrangement with a bank. The compensating balance is part of cash if it is not legally
restricted as to withdrawal. Otherwise, if it is legally restricted, the compensating balance is excluded from the amount
shown as "cash", and shown separately as current or noncurrent asset depending on the bank loan to which it is
related.
If the related bank loan is short-term, the restricted compensating balance is a current asset. If the related bank loan is
long-term, the restricted compensating balance is a noncurrent asset.
18
.Answer is (A).
BPI 3,155,000
Currency and coins 1,135,000
Petty cash fund (50,000 - 10,000) 40,000
Total 4,330,000
The outstanding check of P320,000 is not deducted from the BPI checking account because the BPI account is
believed to be the balance per book. The term "bank statement" appearing on the problem simply signifies that the
outstanding check was determined from the bank statement. It does not mean that the checking account in BPI is the
balance per bank statement. The deposit in bank closed by BSP is a noncurrent asset.
19
.Answer is (B).
Balance per book 6,776,000
Bank service charge ( 6,000)
Book error in recording check 9,000
Adj usted book balance 6,779,000
Balance per bank 6,532,000
Deposit in transit 1,234,000
Outstanding checks (987,000)
Adjusted bank balance 6,779,000
Adjusted cash in bank 6,779,000
Currency and coins 950,000
Petty cash fund (50,000 - 10,000) 40,000
Total cash 7,769,000
20
.Answer is (C).
Adjusted bank balance (3,600,000 - 1,200,000 + 400,000 + 50,000) 2,850,000
21
.Answer is (A).
Balance per book 4,500,000
Collection by bank 94,000
NSF check ( 32,000)
Book error-customer's check (54,000-45,000) ( 9,000)
Book error - check written (97,000 - 79,000) 18,000
Adjusted book balance 4,571,000
The deposit in transit of P230,000 is a bank reconciling item.
22
.Answer is (D).
Balance per bank 1,805,000
Deposit in transit 325,000
Total 2,130,000
Outstanding checks ( 275,000)
Adjusted bank balance 1,855,000
The customer's check which is returned for insufficient fund and the bank service charge are ignored because
these are book reconciling items.
23
.Answer is (B).
Per bank statement 3,800,000
Deposit in transit 520,000
Outstanding checks 675,000)
Bank error 40,000)
Adjusted bank balance 3,605,000
24
.Answer is (B).
Per book 1,000,000
Bank charges (3,000)
Note collected by bank 375,000
Interest oh note 15,000
NSF (62,000)
Note charged to account ( 250,000)
Adjusted book balance 1,075,000
25
.Answer is (C).
Balance per bank 2,000,000
Deposit in transit 200,000
Total 2,200,000
Outstanding checks (500,000-100,000) ( 400,000)
Erroneous bank credit (300,000)
Adjusted bank balance 1,500,000
The certified check of PI00,000 is no longer outstanding for reconciliation purposes. Thus, the amount is
deducted from the total outstanding checks.
26
.Answer is (B).
Balance per book 8,500,000
Note collected by bank 950,000
Total 9,450,000
Book error (200,000-20,000) ( 180,000)
NSF check ( 250,000)
Service charge ( 20,000)
Adjusted book balance 9,000,000
27
.Answer is (B).
Balance per ledger 920,000
Unrecorded customer check 35,000
Bank service charge ( 15,000)
NSF check ( 40,000)
Adjusted book balance 900,000.
28
.Answer is (C).
Balance per bank 2,800,000
Deposit in transit 195,000
Outstanding check (100,000)
Adjusted cash in bank 2,895,000
Cash on hand 200,000
Total cash 3,095,000
29
.Answer is (C).
Balance per book 3,130,000
Overstatement of creditor check 270,000
Understatement of customer check 180,000
NSF check ( 50,000)
Bank debit memo for safety deposit box ( 5,000)
Unrecorded check ( 125,000)
Adjusted book balance 3,400,000
Balance per bank 3,500,000
Undeposited collections 550,000
Checks outstanding ( 650,000)
Adjusted bank balance 3,400,000
30
.Answer is (C).
Balance per book 2,700,000
Add: Proceeds of bank loan 940,000
Note collected by bank 435,000 1,375,000
Total 4,075,000
Less: Service charge 10,000
Customer's check charged back 50,000 60,000
Adjusted book balance 4,015,000
31
.Answer is (D).
Balance per book 1,300,000
Add: Overstatement of check number 765 20,000
Check number 555 stopped for payment 10,000 30,000
Total 1,330,000
Less: Service charge 5,000
NSF check 85,000 90,000
Adjusted book balance 1,240,000
32
.Answer is (C).
Balance per book 1,719,000
Service charge ( 10,000)
Debit memo for printed checks ( 12,000)
Proceeds of bank loan 570,000
Proceeds of customer's note 810,000
NSF check ( 77,000)
Adjusted book balance 3,000,000
33
.Answer is (C).
Book balance 1,405,000
Collection of note 2,500,000
Interest on note 150,000
Book error on Check No. 175 45,000
Bank service charge ( 45,000)
Water bills ( 205,000)
NSF check ( 220,000)
Adjusted book balance 3,630,000
34
.Answer is (B).
Balance per bank 2,800,000
Deposits in transit 350,000
Outstanding checks ( 650,000)
Adjusted bank balance 2,500,000
Balance per ledger (SQUEEZE) 2,520,000
Interest income 10,000
Service charge ( 12,000)
Book error (64,000-46,000) ( 18,000)
Adjusted book balance 2,500,000
The cash balance per ledger is "squeezed" by working back from the adjusted balance.
35
.Answer is (A).
Balance per bank 3,735,000
Erroneous bank credit ( 21,000)
Deposit in transit 103,000
Outstanding checks ( 302,000)
Adjusted bank balance 3,515,000
36
.Answer is (C).
February 2 8 book balance 1,460,000
Note collected by bank 100,000
Interest earned on note 10,000
NSF check (130,000)
Bank service charges (2,000 + 3,000) (5,000)
Adjusted book balance 1,435,000
Balance per bank statement (SQUEEZE) 1,532,000
Deposit in transit 85,000
Bank error - erroneous charge 20,000
Outstanding checks (202,000)
Adjusted bank balance 1,435,000
The bank statement balance is "squeezed" by working back from the adjusted balance.
37
.Answer is (A).
Balance per book 1,652,000
Service charge ( 2,000)
Adjusted book balance 1,650,000
Balance per bank 2,090,000
Deposit in transit (SQUEEZE) 150,000
Total 2,240,000
Outstanding checks ( 590,000)
Adjusted bank balance 1,650,000
The deposit in transit is "squeezed" by working back from the adjusted balance.
38
.Answer is (B).
Balance per ledger 750,000
Service charges (10,000)
Collection of note 300,000
Book error (90,000-60,000) 30,000
Unrecorded check for traveling expenses ( 100,000)
Adjusted book balance 970,000
Balance per bank 1,240,000
Deposit in transit 280,000
Total 1,520,000
Outstanding checks (SQUEEZE) ( 550,000)
Adjusted bank balance 970,000
The amount of outstanding checks is "squeezed" by working back from the adjusted bank balance.
39
.Answer is (D)
Checks and charges by bank in November 550,000
Service charge in November ( 4,000)
NSF check in November ( 20,000)
Checks paid by bank in November 526,000
Total credits to cash in all journals during November 620,000
Service charge in October recorded in November ( 2,000)
Checks issued by depositor in November 618,000
Outstanding checks - October 31 230,000
Total checks to be paid by bank 848,000
Checks paid by bank in November (526,000)
Outstanding checks - November 30 322,000
The customer NSF check in October and redeposited in November is ignored in the computation because no entry was
made by depositor in either October or November.
40
.Answer is (C).
Book balance 8,524,000
Note collected 935,000
Total 9,459,000
Book error (183,000-138,000) (45,000)
NSF check (250,000)
Service charge ( 15,000)
Adjusted book balance 9,149,000
Debit to cash in bank 935,000
Credit to cash in bank 310,000
Net debit to cash in bank 625,000
41
.Answer is (C).
Bank receipts for April 6,000,000
Deposits in transit - March 31 (1,000,000)
Deposits in transit - April 30 1,500,000
Book receipts for April 6,500,000
42
.Answer is (C).
Bank disbursements for July 9,000,000
Outstanding checks - June 30 (1,400,000)
Outstanding checks - July 31 1,000,000
Book disbursements for July 8,600,000
43
.Answer is (D).
Balance per bank - July 31 (9,800,000 + 6,500,000 - 9,000,000) 7,300,000
Deposits in transit - July 31 1,200,000
Outstanding checks - July 31 (1,000,000)
Adjusted cash in bank - July 31 7,500,000
44
.Answer is (C).
Balance per bank - June 30 3,000,000
July bank deposits 9,000,000
July bank disbursements ( 7,000,000)
Balance per bank - July 31 5,000,000
July deposit in transit 1,000,000
July outstanding checks ( 600,000)
Adjusted bank balance 5,400,000
45
.Answer is (B).
Deposits per bank statement for July 9,000,000
Note collected by bank in July (200,000)
Deposit in transit-June 30 ' (400,000)
Deposit in transit - July 31 1,000,000
Cash receipts per book for July 9,400,000
46
.Answer is (A).
Disbursements per bank statement for July 7,000,000
NSF check in July ( 140,000)
Service charge in July (10,000)
Outstanding checks - June 30 (900,000)
Outstanding checks - July 31 600,000
Cash disbursements per book for July 6,550,000
Proof of the cash balance per book - July 31
Balance per book - June 30 2,500,000
Book receipts for July 9,400,000
Book disbursements for July (6,550,000)
Balance per book - July 31 5,350,000
47
.Answer is (B).
Balance per bank - November 30 3,600,000
December deposits 5,500,000
Total 9,100,000
December disbursements (4,400,000)
Balance per bank - December 31 4,700,000
Deposit in transit - December 700,000
Outstanding checks - December (500,000)
Adjusted bank balance - December 31 4,900,000
Balance per book - December 31 (SQUEEZE) 4,300,000
Note collected by bank 1,000,000
NSF check (350,000)
Service charge (50,000)
Adjusted book balance 4,900,000
48
.Answer is (A).
December bank deposits 5,500,000
Note collected by bank in December (1,000,000)
Deposit in transit - November 30 ( 800,000)
Deposit in transit - December 31 700,000
December book receipts 4,400,000
49
.Answer is (A).
December bank disbursements 4,400,000
NSF check in December (350,000)
Service charge in December ( 50,000)
Outstanding checks - November 30 (1,200,000)
Erroneous bank credit in November ( 200,000)
Outstanding checks - December 31 500,000
December book disbursements 3,100,000
50
.Answer is (D).
Checks outstanding - May 31 30,000
Checks recorded by book in June 2,360,000
Total 2,390,000
Checks recorded by bank in June (2,300,000)
Checks outstanding - June 30 90,000
51
.Answer is (C).
Deposits in transit - May 31 300,000
Deposits recorded by book - June 1,800,000
Total 2,100,000
Deposits recorded by bank - June (1,620,000)
Deposits in transit-June 30 480,000
52
.Answer is (B).
Balance per bank - June 30 1,830,000
Deposits in transit - June 30 480,000
Outstanding checks - June 30 (90,000)
Adjusted bank balance 2,220,000