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1E

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Intermediate Accounting (Kieso)
Found in: Page 364

Short Answer

The controller for Clint Eastwood Co. is attempting to determine the amount of cash to be reported on its December 31, 2017, balance sheet. The following information is provided.

1. Commercial savings account of $600,000 and a commercial checking account balance of $900,000 are held at First National Bank of Yojimbo.

2. Money market fund account held at Volonte Co. (a mutual fund organization) permits Eastwood to write checks on this balance, $5,000,000.

3. Travel advances of $180,000 for executive travel for the first quarter of next year (employee to reimburse through salary reduction).

4. A separate cash fund in the amount of $1,500,000 is restricted for the retirement of long-term debt.

5. Petty cash fund of $1,000.

6. An I.O.U. from Marianne Koch, a company customer, in the amount of $190,000.

7. A bank overdraft of $110,000 has occurred at one of the banks the company uses to deposit its cash receipts. At the present time, the company has no deposits at this bank.

8. The company has two certificates of deposit, each totaling $500,000. These CDs have a maturity of 120 days.

9. Eastwood has received a check that is dated January 12, 2018, in the amount of $125,000.

10. Eastwood has agreed to maintain a cash balance of $500,000 at all times at First National Bank of Yojimbo to ensure future credit availability.

11. Eastwood has purchased $2,100,000 of commercial paper of Sergio Leone Co. which is due in 60 days.

12. Currency and coin on hand amounted to $7,700.

Instructions

(a) Compute the amount of cash to be reported on Eastwood Co.’s balance sheet at December 31, 2017.

(b) Indicate the proper reporting for items that are not reported as cash on the December 31, 2017, balance sheet.

1. Cash balance reported in the balance sheet equals $8,608,700.

2. All other items are classified as per their nature and liquidity. While the compensating balance does not appear on the balance sheet.

See the step by step solution

Step by Step Solution

Definition of Restricted Cash

Restricted cash can be defined as the cash held by the business entity for some specific purpose and cannot be used for any other purpose.

Amount of cash to be reported on the balance sheet

Particular

Amount $

Commercial saving account

$600,000

Commercial checking account

900,000

Money market funds

5,000,000

Petty cash

1,000

Commercial paper

2,100,000

Currency and coins on hand

7,700

Cash Balance

$8,608,700

Reporting other items

Item

Reported as

Travel advances

Receivables – employee

Restricted cash

Non-current assets (Restricted cash for the retirement of bonds)

IOU from Marianne Koch

Receivables

Bank overdraft

Current liabilities

Certificate of Deposits

Temporary investment

Check

Accounts receivables

Note: Compensation balance must be disclosed in the notes to the financial statement.

Most popular questions for Business-studies Textbooks

(Accounting for Zero-Interest-Bearing Note) Soon after beginning the year-end audit work on March 10 at Engone Company, the auditor has the following conversation with the controller.

Controller: The year ended March 31st should be our most profitable in history and, as a consequence, the board of directors has just awarded the officers generous bonuses.

Auditor: I thought profits were down this year in the industry, according to your latest interim report.

Controller: Well, they were down, but 10 days ago we closed a deal that will give us a substantial increase for the year.

Auditor: Oh, what was it?

Controller: Well, you remember a few years ago our former president bought stock in Henderson Enterprises because he had those grandiose ideas about becoming a conglomerate. For 6 years we have not been able to sell this stock, which cost us $3,000,000 and has not paid a nickel in dividends. Thursday we sold this stock to Bimini Inc. for $4,000,000. So, we will have a gain of $700,000 ($1,000,000 pretax) which will increase our net income for the year to $4,000,000, compared with last year’s $3,800,000. As far as I know, we’ll be the only company in the industry to register an increase in net income this year. That should help the market value of the stock!

Auditor: Do you expect to receive the $4,000,000 in cash by March 31st, your fiscal year-end?

Controller: No. Although Bimini Inc. is an excellent company, they are a little tight for cash because of their rapid growth. Consequently, they are going to give us a $4,000,000 zero-interest-bearing note with payments of $400,000 per year for the next 10 years. The first payment is due on March 31 of next year.

Auditor: Why is the note zero-interest-bearing?

Controller: Because that’s what everybody agreed to. Since we don’t have any interest-bearing debt, the funds invested in the note do not cost us anything and besides, we were not getting any dividends on the Henderson Enterprises stock.

Instructions

Do you agree with the way the controller has accounted for the transaction? If not, how should the transaction be accounted for?

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