[Bluetoothray]

So In my studying I came across two of these cash questions.

The first is question #233.
Smith Co. has a checking account at Small Bank and an interest-bearing savings account at Big Bank. On December 31 of the current year, the bank reconciliations for Smith are as follows:

Big Bank
——–
Bank balance $150,000
Deposit in transit 5,000
Book balance 155,000

Small Bank
———-
Bank balance $1,500
Outstanding checks (8,500)
Book balance (7,000)
What amount should be classified as cash on Smith’s balance sheet at December 31?

A.
$148,000

B.
$151,000

Correct C.
$155,000

D.
$156,000

I understand how option C is correct. The negative balance in “small bank” is a liability. In question 229, however, the liability is included in the cash balance.
On December 31, 20X1, Kale Co. had the following balances in the accounts it maintains at First State Bank:

Checking account 101 $175,000
Checking account 201 (10,000)
Money market account 25,000
90-day certificate of deposit
due February 28, 20X2 50,000
180-day certificate of deposit
due March 15, 20X2 80,000
Kale classifies investments with original maturities of three months or less as cash equivalents. On the December 31, 20X1, balance sheet, what amount should Kale report as cash and cash equivalents?

A.
$190,000

B.
$200,000

Correct C.
$240,000

D.
$320,000

In this question the -10k in checking account 201, presumable a draw on a line of credit is included in the total “cash and cash equivalent’s” balance. This seems incorrect. Am I missing something?

[Anonymous]

Hi Bluetoothray,

I think the difference lies in the fact that the second question has all of its activity at one bank. When the accounts are at one bank and one has a negative balance (is overdrawn), you can net them together. However, if you have one negative balance and a positive bank between two banks you cannot do that.

I'm tired of operating in fear and mediocrity. It's time to try. It's time to do. It's time to go.

[Ana]

it could be that in example 1 the money is separated as cash and liab b/c they're are in separate banks. but in example two it's all in first bank. you'll come across other contradicting MCQ'd and solutions and you just chalk it up to be part of the cpa nightmare.

[Missy]

The difference is that in the second question the negative 10k is already part of the bank balance,and not outstanding. If the $8500 in outstanding checks in the first question had already been cashed and the bank balance was -7000 they could have been netted even if at different banks.

Licensed Massachusetts Non Reporting CPA since 2012
Finance/Admin/HR Manager

[Author]

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