CASH AND CASH EQUIVALENTS

PROBLEM NO. 1
On December 31, 2020, NO FERA Co. provided the following data:

Cash in bank 4,000,000.00

Time deposit – 30 days 3,000,000.00
Money market placement due on June 30, 2021 2,000,000.00
Saving deposit in a closed bank 100,000.00
Sinking fund for bond payable due on June 30, 2022 1,500,000.00
Petty cash fund 20,000.00

Additional information:
A. The cash in bank included customer check of P100,000 outstanding for 18-months.

B. Check of P200,000 in payment of accounts payable was dated and recorded on December 31, 2020 but mailed to creditors
only on January 15, 2021.

C. Check of P150,000 dated January 31, 2021 in payment of accounts payable was recorded and mailed on December 31,
2020.

D. The reporting period of the entity is the calendar year. The cash receipts journal was held open until January 15, 2021
during which time an amount of P500,000 was collected and recorded on December 31, 2020.

REQUIRED:
1. Prepare the adjusting entries related to the cash items on December 31, 2020.

2. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020.

3. Explain the presentation of the items excluded from cash and cash equivalents.

ANSWERS AND EXPLANATIONS (Problem No. 1):

1A Accounts receivable 100,000.00
Cash in bank 100,000.00

Explanation: When checks received from customers are not immediately deposited and have been outstanding for a
long period of time (hence, considered already as STALE), the same lose their character of being readily acceptable by
the bank for immediate deposit and credit, hence, are no longer considered cash but must be reverted back to Accounts
Receivable account (since the checks came from the customers).

1B Cash in bank 200,000.00

Accounts payable 200,000.00

Explanation: Check payments are considered as validly paid if they satisfy the following: (1) DATED - the check date is
either the date of issuance or an earlier date; (2) DELIVERED - the check must have been delivered to the payee as of
the cut-off date; and (3) IN GOOD FORM - the check does not contain any mark, must bear all required signature, must
not be dilapidated etc.. Since the check under Item B is undelivered as of cut-off date, no valid payment is made, hence,
the amount must be reverted back to cash in bank and the liability to the payee must be re-established.

1C Cash in bank 150,000.00

Accounts payable 150,000.00

Explanation: Since the check under Item C is post-dated, no valid payment is made, hence, the amount must be
reverted back to cash in bank and the liability to the payee must be re-established. (See explanation under Item No. 1B)

1D Accounts receivable 500,000.00

Cash in bank 500,000.00
 Explanation: Item D is an example of window dressing where the books of the Company are deliberately held open until
the first few days of the immediately succeeding period. Transactions made in the succeeding period are recorded in the
current year,as if the same transpired during the current year to provide a favorable picture of the Company's financial
performance and/or position.

2 Cash in bank [ 4,000,000 - 100,000 + 200,000 + 150,000 - 500,000 ] 3,750,000.00

Time deposit - 30 days 3,000,000.00
Petty cash fund 20,000.00
Total cash and cash equivalents 6,770,000.00

Explanations:
a) The time deposit is included since the term of the deposit is only 30 days ("3 months or less" rule).

b) The money - market placement was not acquired within 3 months before date of maturity, hence, it does not qualify as
a cash equivalent.

c) The savings deposit is excluded from cash since it pertains to a deposit that is held in a closed bank, hence, not
available for current use.

d) The savings deposit is excluded from cash since the liability to which it pertains is classified as a noncurrent liability as
at December 31, 2020. Accordingly, applying the rule on "parallel treatment", the sinking fund will follow the
classification of the related liability.

e) The PCF is included since it is available for current use.

3 The money - market placement is reported as a short-term investment (holding period over 3 months but not over 1 year).

The saving deposit in a closed bank is reported as other noncurrent asset.

The sinking fund is classified as a noncurrent investment and is presented among noncurrent assets.

PROBLEM NO. 2
On December 31, 2020, NO FERA Co. provided the following data:
Cash on hand 500,000.00
Petty cash fund 50,000.00
Security bank – current account 3,000,000.00
PNB - current account 1,200,000.00
BDO – current account (overdraft) (300,000.00)
BSP – treasury bill (120 days) 1,000,000.00
BPI – time deposit 500,000.00
Bond sinking fund 1,500,000.00

Additional information:
A. The cash on hand included a customer post-dated check of P150,000 and postal money order of P40,000.

B. The petty cash fund included unreplenished petty cash vouchers for P10,000 and an employee check for P5,000 dated
January 31, 2021.

C. The BPI – time deposit is set aside for the acquisition of land to be made in early January 2021.

D. The bond sinking fund is set aside for the payment of bond payable due on December, 31, 2021.

REQUIRED:
1. Prepare the adjusting entries related to the cash items on December 31, 2020.

2. Compute the total amount of cash and cash equivalents that should be reported on December 31, 2020.

3. Explain the presentation of the items excluded from cash and cash equivalents.
ANSWERS AND EXPLANATIONS (Problem No. 2):
1A Accounts receivable 150,000.00
Cash on hand 150,000.00

Explanation: Checks received from customers that are post-dated lose their character of being readily acceptable by the
bank for immediate deposit and credit, hence, are not considered cash yet but must be reverted back to Accounts
Receivable account (since the checks came from the customers). The postal money order, if silent is assumed to be
dated, hence part of cash since it is readily acceptable by the bank for deposit.

1B Expenses 10,000.00
Receivable from employees 5,000.00
Petty cash fund 15,000.00

Explanation: The fund was not replenished at year-end. Under the imprest fund system of accounting for PCF, an
adjusting entry is required in order to reflect the actual balance of the fund at year-end and to record the charges made
against the fund. The unreplenished petty cash vouchers are assumed to pertain to various expenses while the
employee check that is post-dated (accomodation check) is debited to Receivable from employees, a nontrade
receivable account. The accomodation check is a check issued to a third-party which was endorsed and encashed out of
the petty cash fund. The accomodation check, if DATED, is part of petty cash fund.

1C No adjusting entry is necessary. The BPI - time deposit is not a cash equivalent item since it is set aside for the
purchase of land, a noncurrent asset. Regardless of the timing of disbursement, a fund set aside for the acquisition of a
noncurrent asset remains to be classified as a noncurrent fund.

1D No adjusting entry is necessary. The bond sinking fund is presented among cash items since the liabllity, for which it was
established, is classified as a current liability as at end of the year. The "parallel treatment" rule is applied for Item D -
liability is current, hence the fund is also classified as current and presented among cash items.

2 Cash on hand ( 500,000 - 150,000 ) 350,000.00

Petty cash fund ( 50,000 -10,000 - 5,000 ) 35,000.00
Security bank - current account 3,000,000.00
PNB - current account 1,200,000.00
Bond sinking fund 1,500,000.00
Total cash and cash equivalents 6,085,000.00

3 The BDO - current account (overdraft) is not offset against the other current accounts since it is maintained in another
bank. It should be presented as a current liability.

The BSP - treasury bill is not a cash equivalent item since its holding period is more than 3 months (120 days). It should
be classified as a short-term investment (holding period or maturity date of more than 3 months but not over 1 year)

The BPI - time deposit is not a cash equivalent item since it is set aside for the purchase of land, a noncurrent asset.
Regardless of the timing of disbursement, a fund set aside for the acquisition of a noncurrent asset remains to be
classified as a noncurrent fund.

PROBLEM NO. 3
On December 31, 2020, NO FERA Co. provided the following data:

Cash on hand 2,000,000.00

Petty cash fund 50,000.00
Cash in bank 5,000,000.00
Savings deposit 3,000,000.00
Time deposit (90 day - term) 1,500,000.00

Additional information:

A. The cash on hand included the following:

(1) Customer check of P100,000 returned by bank on December 26, 2020 due to insufficient fund but subsequently
redeposited and cleared by bank on January 05, 2021.
 (2) Customer check for P150,000 dated January 20, 2021, received on December 23, 2020.

(3) Postal money orders received from customers, P250,000.

B. The petty cash fund is comprised of the following items as at end of the year:
Currency & coins 2,000.00
Employees’ IOUs 10,000.00
Currency in envelope marked “collections for Christmas party” 5,000.00
Check drawn by NO FERA payable to the PCF cashier 33,000.00
Total petty cash fund 50,000.00

C. A check written, dated and delivered to the payee on December 23, 2020 amounting to P200,000 in payment of accounts
payable was recorded during 2020 and was found to lack one of the required signatures.

REQUIRED:
(1) Adjusting entries related to the cash items on December 31, 2020
(2) Total cash on December 31, 2020

ANSWERS AND EXPLANATIONS (Problem No. 3):

1A.1 Accounts receivable 100,000.00

Cash on hand 100,000.00

Explanation: Checks previously received from customers and other parties which were deposited and subsequently
returned by the bank due to insufficiency of fund (NSF checks) should be reverted back to receivables since the same
are not yet considered collected because the checks are not acceptable by the bank for immediate credit. No adjusting
entry is made if NSF checks returned by the bank are subsequently redeposited and cleared the bank during the same
accounting period.

1A.2 Accounts receivable 150,000.00

Cash on hand 150,000.00

Explanation: Checks received from customers that are post-dated lose their character of being readily acceptable by the
bank for immediate deposit and credit, hence, are not considered cash yet but must be reverted back to Accounts
Receivable account (since the checks came from the customers).

1A.3 No adjusting entry is required. The postal money order is readily acceptable by the bank for immediate deposit and
credit, hence, the item is properly reported as part of cash.

1B Receivable from employees 10,000.00

Cash short/over 5,000.00
Petty cash fund 15,000.00

Explanation: The check drawn before year-end payable to the petty cash custodian represents the replenishment check
for the period. However, the Employee IOUs charged to the PCF are not considered cash as at year-end but must be
reported as receivables. Further, the collections for the Christmas Party which were reflected as part of the PCF should
be excluded from the fund and a cash shortage must be recognized at year-end.

1C Cash in bank
Accounts payable

Explanation: No valid payment was made since the check lacks one of the required signatures. Accordingly, the entry
for the payment must be reversed.

2 Cash on hand ( 2,000,000 - 100,000 - 150,000 ) 1,750,000.00

Petty cash fund ( 50,000 -15,000 ) 35,000.00
Cash in bank ( 5,000,000 + 200,000 ) 5,200,000.00
Savings deposit 3,000,000.00
Total cash as at December 31, 2020 9,985,000.00
 NOTE: The time deposit is a cash equivalent item (90-day term). However, since the requirement at year-end is TOTAL
CASH only, cash equivalent items are therefore not considered. Should the problem require the total cash and cash
equivalents at year-end, the answer would then be P 11,735,000 ( 9,985,000 + 1,750,000 )

PROBLEM NO. 4
NO FERA Co. reported the following accounts on December 31, 2020:

Cash on hand 200,000.00

Petty cash fund 20,000.00
CDO current account 5,000,000.00
Tsinabank current account No. 1 4,000,000.00
Tsinabank current account No. 2 (overdraft) (100,000.00)
Waterbank savings account 250,000.00
Waterbank time deposit - 90 days 2,000,000.00

Additional information:

A. Cash on hand included the following items:

(1) Customer check for P30,000 returned by bank on December 26, 2020 due to insufficient fund but subsequently
redeposited and cleared by the bank on January 10, 2021.

(2) Customer check for P20,000 dated January 15, 2021, received on December 22, 2020.

B. The petty cash fund consisted of the following items:

Currency and coins 5,000.00
IOUs from employees 2,000.00
Unreplenished petty cash vouchers 12,000.00
Total 19,000.00

C. Included among the checks drawn by NO FERA against the CDO current account and recorded in December 2020 were the
following:

(1) Check written and dated December 21, 2020 and delivered to payee on January 07, 2021, P 100,000.

(2) Check written on December 27, 2020 dated January 08, 2021, delivered to payee on December 28, 2020, P75,000.

REQUIRED:
1. Prepare the adjusting entries related to cash and cash equivalents on December 31, 2020.
2. Compute the total cash and cash equivalents as at December 31, 2020.

ANSWERS AND EXPLANATIONS (Problem No. 4):

1A.1 Accounts receivable 30,000.00

Cash on hand 30,000.00

Explanation: Checks previously received from customers and other parties which were deposited and subsequently
returned by the bank due to insufficiency of fund (NSF checks) should be reverted back to receivables since the same
are not yet considered collected because the checks are not acceptable by the bank for immediate credit. No adjusting
entry is made if NSF checks returned by the bank are subsequently redeposited and cleared the bank during the same
accounting period.

1A.2 Accounts receivable 20,000.00

Cash on hand 20,000.00

Explanation: Checks received from customers that are post-dated lose their character of being readily acceptable by the
bank for immediate deposit and credit, hence, are not considered cash yet but must be reverted back to Accounts
Receivable account (since the checks came from the customers).
1.B Receivable from employees 2,000.00
Expenses 12,000.00
Cash short/over 1,000.00
Petty cash fund 15,000.00

Explanation: The Employee IOUs charged to the PCF are not considered cash as at year-end but must be reported as
receivables whie the unreplenished PC vouchers are assumed to be related to expense charges, hence, are debited to
Expenses. Further, the difference between the should be balance of the fund of P6,000 (P20,000 - P2,000 - P12,000)
and the balance of P5,000 as reported by the custodian should be initially recognized as a cash shortage at year-end.

1.C.1 Cash in bank 100,000.00

Accounts payable 100,000.00

Explanation: Check payments are considered as validly paid if they satisfy the following: (1) DATED - the check date is
either the date of issuance or an earlier date; (2) DELIVERED - the check must have been delivered to the payee as of
the cut-off date; and (3) IN GOOD FORM - the check does not contain any mark, must bear all required signature, must
not be dilapidated etc.. Since the check under Item C.1 is undelivered as of cut-off date, no valid payment is made,
hence, the amount must be reverted back to cash in bank and the liability to the payee must be re-established.

1.C.2 Cash in bank 75,000.00

Accounts payable 75,000.00

Explanation: Since the check under Item C.2 is post-dated, no valid payment is made, hence, the amount must be
reverted back to cash in bank and the liability to the payee must be re-established. (See explanation under Item No. 1.C1)

2 Cash on hand ( 200,000 - 30,000 - 20,000 ) 150,000.00

Petty cash fund ( 20,000 - 15,000 ) 5,000.00
CDO current account ( 5,000,000 + 100,000 + 75,000) 5,175,000.00
Tsinabank current accounts, net of overdraft (4,000,000 - 100,000 ) 3,900,000.00
Waterbank savings account 250,000.00
Waterbank time deposit - 90 days 2,000,000.00
Total cash and cash equivalents 11,480,000.00

The overdraft in Tsinabank current account No. 2 is offset against the balance of Tsinabank current account No. 1 since
the two accounts are maintained in the same bank.

The Waterbank savings account and time deposit (90 days) account are cash and cash equivalent items since they both
satisfy the qualification requirements for cash (savings account) and cash equivalents (time deposit).

PROBLEM NO. 5
NO-FERA Co. provided the following transactions related to its petty cash fund for the year-ended June 30, 2020:

May 2 - The entity established a petty cash fund amounting to P10,000.

29 - The fund is replenished. The petty cash fund included the following items prior to replenishment:
Currency and coins 2,000.00
Postage 1,000.00
Supplies 3,000.00
Transportation 2,500.00
Miscellaneous expense 1,500.00
Total 10,000.00

June 30 - The fund was not replenished. The fund is composed of the following items:
Currency and coins 6,000.00
Supplies 2,000.00
Postage 1,000.00
Transportation 1,000.00
Total 10,000.00
July 15 - The fund is replenished and increased to P15,000.

REQUIRED:
1. Journal entries under the imprest fund system.
2. Journal entries under the fluctuating fund system.

IMPREST FUND SYSTEM: FLUCTUATING FUND SYSTEM:

2020 May
Establishment of the fund
2 Petty cash fund 10,000.00 Petty cash fund 10,000.00
Cash in bank 10,000.00 Cash in bank 10,000.00

Explanation:
A check is issued upon establishment of the PCF. A check is issued upon establishment of the PCF.

Charges against the fund

2-29 No entry Postage 1,000.00
Supplies 3,000.00
Transportation 2,500.00
Miscellaneous expense 1,500.00
Petty cash fund 8,000.00

Explanation:
No entry is required when charges are made against the A formal entry is made to record the charges made against
PCF. However, the charges must be accompanied by a the fund and to reduce the amount of the fund equal to the
PC voucher and an update must be made in the PC Book. total amount of charges.

Replenishment of the fund

29 Postage 1,000.00 Petty cash fund 8,000.00
Supplies 3,000.00 Cash in bank 8,000.00
Transportation 2,500.00
Miscellaneous expense 1,500.00
Cash in bank 8,000.00

Explanation:
A formal entry is made to record the charges made A formal entry is made to bring back what was charged
against the fund along with a credit to the cash in bank against the fund through a debit to the Petty cash fund
account in order to bring the fund balance back to its account and a credit to Cash in bank account.
imprest balance.

Charges against the fund

2020 May 30 to June 30
No entry Supplies 2,000.00
Postage 1,000.00
Transportation 1,000.00
Petty cash fund 4,000.00

Explanation:
No entry is required when charges are made against the A formal entry is made to record the charges made against
PCF. However, the charges must be accompanied by a the fund and to reduce the amount of the fund equal to the
PC voucher and an update must be made in the PC Book. total amount of charges.

2020 June
Adjustment at year-end
30 Supplies 2,000.00 No adjusting entry
Postage 1,000.00
Transportation 1,000.00
Petty cash fund 4,000.00
Explanation:
An adjusting entry is prepared at year-end to record the No adjusting entry is required since the fund is updated after
charges previously made against the fund and to reflect each disbursement. However, should there be any overage or
the actual balance of the fund at year-end. shortage, the PCF should be adjusted to reflect the actual
fund balance.

2020 July
Reversing entry at the start of the new accounting period
1 Petty cash fund 4,000.00 No entry is necessary
Supplies 2,000.00
Postage 1,000.00
Transportation 1,000.00

Explanation:
A reversing entry is made in order to restore the usual No reversing entry is necessary since no adjustment is made
recording of PCF transactions under the imprest fund at year-end under the fluctuating fund system of accounting
system of accounting. for PCF.

Charges against the fund

1-15 No entry Supplies 1,500.00
Postage 500.00
Transportation 500.00
Miscellaneous expense 500.00
Petty cash fund 3,000.00

Explanation:
No entry is required when charges are made against the The charges recorded pertain to the difference between the
PCF. However, the charges must be accompanied by a cumulative amounts of the disbursements and the balances
PC voucher and an update must be made in the PC Book. at year-end (e.g. Supplies = P3,500 - P2,000)

Replenishment of the fund and increase in the fund balance

15 Supplies 3,500.00 Petty cash fund 12,000.00
Postage 1,500.00 Cash in bank 12,000.00
Transportation 1,500.00
Miscellaneous expense 500.00
Cash in bank 7,000.00

Petty cash fund 5,000.00

Cash in bank 5,000.00

Alternative entry:
Petty cash fund 5,000.00
Supplies 3,500.00
1,500.00
Transportation 1,500.00
Miscellaneous expense 500.00
Cash in bank 12,000.00

Explanation:
The charges were recorded based on their cumulative The increase in PCF and the replenishment of the charges
balances which will be netted against the amounts made against the fund are debited to the PCF account and
reflected in the reversing entry. Hence the supplies credited to Cash in bank account (P7,000 + P5,000).
expense for July would amount to P1,500 only (P3,500-
P2,000). The increase in PCF is debited to the PCF
account and credited to Cash in bank account together
with the replenishment amount (P7,000 + P5,000).