Accounting Questions
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Accounting Questions
Chapter 7
Exercise 7-1: Review of Items on the Balance Sheet’s Cash Caption
In the balance sheet, cash is classified as a current asset. It is usually treated with an increase on the debit side and a decrease on the credit side. Items as always listed in order of their liquidity in the balance sheet. As such, cash always appears at the top of the balance since there is no other asset that can be more liquid than it. Also, it is important to note that cash is the standard medium of exchange and forms the measuring yardstick for other items used in accounting. Another thing to note is that cash is not just included in the cash caption of the balance sheet because of its high liquidity. There are two important characteristics that a cash caption item in the balance sheet must meet. These include being readily available for use to settle immediate obligations and being free from other contractual obligations or restrictions that can potentially limit its use, especially in matters such as settling debts.
Items classified as cash include currency, coins as well as cash at the bank—also savings in bank qualify as cash item since they can be withdrawn to settle urgent obligations. However, banks can exercise some power over the withdrawal of savings, especially when the rules demand notice before undertaking a withdrawal. Other items such as money orders, bank overdrafts, certified checks as well as personal checks and cashier’s checks can be classified as cash items in the balance sheet.
Exercise 7-5: Exchange of Noncash item for Promissory Note where the Item Fair Value is not known
There are always those moments when a note can be received in place of cash in the exchange of goods, property, or services. Such often take place in a bargained transaction and often treats the stated rate of interest as the fair value hence utilized in the computation of revenue interest unless:
- The transaction does not involve interest rate in whatever manner, or
- The rate of interest stated does not reflect reality, or
- The amount denoted by the note lack material consistency with the current cash sales price for the same.
Exercise 7-7: Computations and Entries Involved in Accounting for the transfer of Receivables treated as Secured Borrowing Transactions
Before issuing a debtor with the good or service on credit arrangement, the creditor has to evaluate the debtor’s creditworthiness or ask for some collateral as a guarantee that the debtor will endeavor to settle the debt within the agreed period of time. However, some circumstances, such as the friendship between the debtor and the creditor, may see the above principles being set aside. One of the tools used by creditors and debtors in transactions involving borrowing as collateral has been receivables. The debtor will continue collecting the accounts receivable, while on the other hand, the account debtors are not notified of the arrangement. In such a circumstance, the creditor can convert the collateral into cash in the event that the debtor breaches the agreed payback plan.
References
http://tfig.unece.org/contents/payables-and-receivables.htm