CASH AND CASH EQUIVALENT

Figure 1: Components of Cash

Figure 2: Components of Cash Equivalent

Figure 3: Classification of Cash Fund

Figure 4: Classification of Compensating Balance

Figure 5: Undelivered and Postdated Check Distinguished

PROBLEM 1 (Computing the Correct Cash Balance)
The following are the cash balances of LEONOR, INC. at December 31, 2003:

Undeposited Collections (in currency and coins) P 23,000

Current Account – Unrestricted 649,300
Disbursement checks written and recorded in
December 2003 but are to be released to the payees in 2004 135,000
Restricted Time Deposits (Expected Use in June 2004) 1,000,000

Leonor, Inc. has agreed to maintain P10,000 compensating balance in its unrestricted current account in
accordance with the loan covenant.

REQUIRED: How much should Leonor, Inc. report as cash and cash equivalents in its December 31, 2003,
balance sheet?

PROBLEM 2 (Computing the Correct Cash Balance)

Your audit of the December 31, 2003, financial statements of DIONISIO CORP. reveals the following:

1. Current Account at Prime Bank P (15,000)

2. Current Account at Prudent Bank 43,200
3. Treasury Bills (acquired 3 months before maturity) 150,000
4. Treasury Bills (Maturity date is 12/31/06) 2,500,000
5. Payroll Account 175,000
6. Foreign Bank Account – restricted (translated using the 12/31/03
exchange rate) 4,000,000
7. Postage Stamps 450
8. Employee Postdated Check 3,500
9. IOU from the Vice President 13,000
10. Credit Memo from supplier for a purchase return 7,200
11. Traveler’s Check 15,000
12. Money Order 7,000
13. Petty Cash Fund (P3,000 in currency and expense receipts for P7,000) 10,000

REQUIRED: What amount would be reported as Cash and Cash Equivalents on the balance sheet on
December 31, 2003?

PROBLEM 3 (Compensating Balance)

EMIL, INC. needs P2,000,000 to finance its expansion program. Emil, Inc. is negotiating a loan with
Metropolis Bank which requires the company to maintain a compensating balance of 10% of the loan
principal on deposit in a current account at the bank. Emil, Inc. currently maintains a balance of P20,000
in its current account. The current account earns interest of 2% per annum; the interest rate on the loan
is 12% per annum

REQUIRED:
1. Determine the principal amount of the loan.
2. Determine the effective interest rate on the loan.
PROBLEM 4 (Petty Cash Fund)
On January 1, 2003, JERVITA COMPANY established a petty cash fund of P2,000. On December 31, 2003,
the petty cash fund was examined and found to have receipts and documents for miscellaneous general
expenses amounting to P1.820. In addition, there was cash amounting to P220.

REQUIRED:
1. What is the amount of petty cash shortage or overage?
2. What entry would be required to adjust the petty cash fund on December 1, 2003?

PROBLEM 5 (Petty Cash Fund)

The auditor for HARRY, INC., examined the petty cash fund immediately after the close of business, July
31, 2003, the end of the company’s natural business year. The petty cash custodian presented the
following during the count:

Currency P 650
Petty Cash Vouchers:
Postage 420
Office Supplies Expense 900
Transportation Expense 140
Computer Repairs 400
Advances to Office Staff 700
A check drawn by Harry, Inc., payable to the petty cash custodian 3,050
Postage Stamps 300
An Employee’s Check, returned by bank, marked NSF 1,000
An envelope containing currency of P440 for a gift for a retiring employee ___440
P 8,000
The general ledger shows an imprest petty cash fund balance of P 8,000

REQUIRED:
1. How much is the petty cash fund shortage or overage?
2. What adjusting entry should be made as of July 31, 2003?
3. What is the adjusted balance of the petty cash fund at July 31, 2003?
SOLUTIONS: Cash and Cash Equivalent

PROBLEM 1 (Computing the Correct Cash Balance)

Undeposited Collections P 23,000
Current Account – Unrestricted 649,300
Unreleased/Undelivered Check 135,000
Total P 807,000

Note: Because the compensating balance is not legally restricted, the amount is part of cash.

PROBLEM 2 (Computing the Correct Cash Balance)

Current Account at Prudent Bank P 43,200
Treasury Bills (acquired 3 months before maturity) 150,000
Payroll Account 175,000
Traveller’s Check 15,000
Money Order 7,000
Petty Cash Fund 3,000
Total Cash and Cash Equivalents P 393,200

PROBLEM 3 (Compensating Balance)

1. (X = Principal Amount of the Loan)
10%X = P 20,000 + (X – P 2,000,000)
10%X = P 20,000 + X – P 2,000,000
10%X – X = -P 1,980,000
90%X = P 1,980,000
X = P 1,980,000/90%
X = P 2,200,000

2. Annual Interest Payment (P 2,200,000 x 12%) P 264,000

Interest Income on the Loan Proceeds in the compensating balance (P
200,000 X 2%) P 4,000
Effective Interest P 260,000
Divide by Loan Proceeds 2,000,000
Effective Interest Rate 13%

PROBLEM 4 (Petty Cash Fund)

1. Cash P 220
Miscellaneous Expenses 1,820
Petty Cash Accounted P 2,040
Petty Cash per Books 2,000
Overage P 40
 2. Miscellaneous General Expenses 1,820
Cash Short or Over 40
Petty Cash Fund 1,780

PROBLEM 5 (Petty Cash Fund)

1. Currency P 650
Petty Cash Vouchers (P420+P900+P140+P400+P700) 2,560
Replenishment Check 3,050
Employee’s NSF Check 1,000
Petty Cash Accounted P 7,260
Petty Cash Fund/Ledger (accountability) 8,000
SHORTAGE P 740

2. a. Postage Expense 420

Office Supplies Expense 900
Transportation Expense 140
Repairs Expense 400
Advances to Employees 700
Petty Cash Fund 2,560

b. Unused Postage Stamps 300

Postage Expense 300

c. Advances to Employees 1,000

Petty Cash Fund 1,000

d. Cash Short or Over 740

Petty Cash Fund 740

3. Currency P 650
Replenishment 3,050
Petty Cash Fund at 7/31/2003 P 3,700