KEY
EXERCISE ANSWER 7-2
1.
Cash balance of $925,000. Only the checking account
balance should be reported as cash. The certificates of
deposit of $1,400,000 should be reported as a temporary
investment, the cash advance to subsidiary of $980,000
should be reported as a receivable, and the utility deposit
of $180 should be identified as a receivable from the gas
company.
2.
Cash balance is $584,650 computed as follows:
Checking account balance
Overdraft
Petty cash
Coin and currency
$600,000
(17,000)
300
1,350
$584,650
Cash held in a bond sinking fund is restricted. Assuming
that the bonds are noncurrent, the restricted cash is also
reported as noncurrent.
3.
Cash balance is $599,800 computed as follows:
Checking account balance
Certified check from customer
$590,000
9,800
$599,800
The postdated check of $11,000 should be reported as a
receivable. Cash restricted due to compensating balance
should be described in a note indicating the type of
arrangement and amount. Postage stamps on hand are
reported as part of office supplies inventory or prepaid
expenses.
4.
Cash balance is $85,000 computed as follows:
Checking account balance
Money market mutual fund
$37,000
48,000
$85,000
The check NSF received from customer should be reported
as a receivable.
5.
Cash balance is $700,900 computed as follows:
Checking account balance
Cash advance received from customer
$700,000
900
$700,900
Cash restricted for future plant expansion of $500,000
should be reported as a noncurrent asset. Short-term
treasury bills of $180,000 should be reported as a
temporary investment. Cash advance received from
customer of $900 should also be reported as a liability;
cash advance of $7,000 to company executive should be
reported as a receivable; refundable deposit of $26,000
paid to federal government should be reported as a
receivable.
EXERCISE 7-8
(a)
The direct write-off approach is not theoretically justifiable
even though required for income tax purposes. Direct
write-off does not match expenses with revenues of the
period, nor does it result in receivables being stated at
estimated realizable value on the balance sheet.
(b)
Bad Debt Expense 2% of Sales = $44,000 ($2,200,000 X
2%)
Bad Debt Expense Direct Write-Off = $31,330 ($7,800 +
$6,700 +
$7,000 + $9,830)
Net income would be $126,670 ($44,000 $31,330) lower
under the percentage-of-sales approach.