[Kairos]

Why is the 800,000 investment included in the cash equivalents calculation and the 500,000 investment excluded? Is it because the 800,000 is a treasury bill and the 500,000 is a bond? Thanks!

Question: 21 Cook Co. had the following balances at December 31, Year 1:
Cash in checking account
$350,000
Cash in money-market account
250,000
U.S. Treasury bill, purchased 12/1/Yr 1,
maturing 2/28/Yr 2
800,000
U.S. Treasury bond, purchased 3/1/Yr 1,
maturing 2/28/Yr 2
500,000
Cook’s policy is to treat as cash equivalents all highly liquid investments with a maturity of 3 months or less when purchased. What amount should Cook report as cash and cash equivalents in its December 31, Year 1, balance sheet?
A. $1,900,000
B. $1,150,000
C. $600,000
D. $1,400,000

Answer (D) is correct.
Cash equivalents are short-term, highly liquid investments. As part of its cash management procedures, an entity makes such investments when cash held exceeds immediate needs. Cash equivalents should be readily convertible to known amounts of cash. They should also be so near their maturity that they present insignificant risk of changes in value because of changes in interest rates. Normally, only investments with original maturities of 3 months or less qualify as cash equivalents. Accordingly, cash and cash equivalents equal $1,400,000 ($350,000 checking account + $250,000 money-market account + $800,000 Treasury bill).

[Anonymous]

It has to do with the time to maturity. Like it says in the answer, “Normally, only investments with original maturities of 3 months or less qualify as cash equivalents.”

U.S. Treasury bill, purchased 12/1/Yr 1,
maturing 2/28/Yr 2

Purchased Dec 1; matured Feb 28 3 months later; technically less than 3 months original maturity.

U.S. Treasury bond, purchased 3/1/Yr 1,
maturing 2/28/Yr 2

Purchased Mar 1; matured Feb 28, 12 months later; basically 1 year original maturity.

So, even though these both mature the same day, their original maturities were different – one less than 3 months and one more.

I think treasury bills usually are 3 months or less and thus usually are cash equivalents, but the key here is the original maturity period, not the title of the investment.

[vodrldnr]

It says ” Cook’s policy is to treat as cash equivalents all highly liquid investments with a maturity of 3 months or less when purchased.”

Calculate the time form Purchase date to Maturity date

if it is 3 month or less => cash equivalent
if not => not cash equivalent

T-BILL => Purchased 12/1 y1 ~ mature Feb ( Total 3month time frame) => Cash

T-Bond => purchased 3/1 y1 ~ 2/28 y2 (Total 1 year time frame) => No cash

[Kairos]

thanks guys! Just realized I read this problem wrong seeing the dates the other way around so I was thinking the treasury bond was purchased after the bill.

[Anonymous]

If it makes you feel any better, I read it wrong when you first posted it, too – somehow transposed the numbers for the treasury bill in my head and thought it was purchased Jan 12 instead of Dec 1, so then thought it would be a “more or less than a year” rule, and got confused when I saw it was the bill that was counted and the bond that wasn't, till I saw the date I'd misread. So…I messed up too, and had to Google it to see if there was something special about treasury bills, then saw something saying almost all treasury bills are less than 3 months, looked at the dates again, and realized my error.

[Kairos]

Yea, it was a silly mistake on my part. Can't believe i'm still tripping on these questions but I really appreciate the help guys!

[Author]

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