CH+07+HW+Solutions - CHAPTER 7 ANSWERS TO QUESTIONS 1 Cash...

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CHAPTER 7
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ANSWERS TO QUESTIONS 1. Cash normally consists of coins and currency on hand, bank deposits, and various kinds of orders for cash such as bank checks, money orders, travelers’ checks, demand bills of exchange, bank drafts, and cashiers’ checks. Balances on deposit in banks which are subject to immediate withdrawal are properly included in cash. Money market funds that provide checking account privileges may be classified as cash. There is some question as to whether deposits not subject to immediate withdrawal are properly included in cash or whether they should be set out separately. Savings accounts, time certificates of deposit, and time deposits fall in this latter category. Unless restrictions on these kinds of deposits are such that they cannot be converted (withdrawn) within one year or the operating cycle of the entity, whichever is longer, they are properly classified as current assets. At the same time, they may well be presented separately from other cash and the restrictions as to convertibility reported. 2. (a) Cash (h) Investments, possibly other assets. (b) Trading securities. (i) Cash. (c) Temporary investments. (j) Trading securities. (d) Accounts receivable. (k) Cash. (e) Accounts receivable, a loss if uncollectible. (l) Cash. (f) Other assets if not expendable, cash if ex- (m) Postage expense, or prepaid ex- pendable for goods and services in the for- pense, or office supplies inventory. eign country. (n) Receivable from employee if the (g) Receivable if collection expected within one company is to be reimbursed; year; otherwise, other asset. otherwise, prepaid expense. 3. 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 long-term borrowing arrangements should be separately classified as a noncurrent asset in either the investments or other assets section. 4. Restricted cash for debt redemption would be reported in the long-term 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 long term. 5. The seller normally uses trade discounts to avoid frequent changes in its catalogs, to quote different prices for different quantities purchased, and to hide the true invoice price from competitors. Trade discounts are not recorded in the accounts because the price finally quoted is generally an accurate statement of the fair market value of the product on that date. In addition, no subsequent changes can occur to affect this value from an accounting standpoint. With a cash discount, the buyer receives a choice and events subsequent to the original transaction dictate that additional entries may be needed.
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Questions Chapter 7
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