Cash Reconciliation Flashcards
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Questions and Answers

What amount of income from the investment should Denver report in its Year 1 income statement?

18000

What should Andrews report as net income for the third quarter of Year 6?

182000

What is Apex Corp.'s cash balance at August 31?

18550

How is the investment account of an investor increased after the date of acquisition?

<p>By its share of the earnings of the investee.</p> Signup and view all the answers

Amortization of goodwill is permitted under the equity method.

<p>False</p> Signup and view all the answers

An investor's carrying amount at the end of the first year will be highest if the bond is purchased at a?

<p>premium</p> Signup and view all the answers

What amount should Purl report for its held-to-maturity bonds on its December 31, Year 2, balance sheet?

<p>468000</p> Signup and view all the answers

How much revenue should Gar report in its Year 1 income statement from the life insurance proceeds?

<p>210000</p> Signup and view all the answers

An increase in the cash surrender value of a life insurance policy owned by a company is recorded by?

<p>cash surrender goes up, expense goes down</p> Signup and view all the answers

What amount should Company C pay for the bonds?

<p>96621</p> Signup and view all the answers

How should holding-to-maturity securities be reported?

<p>at amortized cost</p> Signup and view all the answers

What should Lipp Company report the compensating balance as?

<p>150000 noncurrent asset</p> Signup and view all the answers

Compensating balances are contra-liabilities.

<p>False</p> Signup and view all the answers

To be considered cash equivalents, a certificate of deposit must have a maturity of ____ months or less.

<p>3</p> Signup and view all the answers

What is the net cash balance after the reconciliation for Hilltop Co.?

<p>53050</p> Signup and view all the answers

What amount should Early Co. report in earnings as a gain or loss on the bond as of December 31, Year 4?

<p>24000</p> Signup and view all the answers

What is the formula for unrealized holding gain?

<p>Unrealized holding gain = FV of the bond - carrying amount</p> Signup and view all the answers

What is cash surrender value classified as?

<p>Noncurrent assets</p> Signup and view all the answers

What amount should Jann Co. report as cash surrender value of officers' life insurance as of December 31, Year 6?

<p>3200</p> Signup and view all the answers

What is the classification of cash surrender value in an insurance policy?

<p>Noncurrent asset</p> Signup and view all the answers

What should Vanity Corporation report in its financial statements at the end of the current year based on the handling of AFS securities?

<p>Both A and B</p> Signup and view all the answers

What is the ending cash balance reported on Dawson's bank statement as of May 31?

<p>38500</p> Signup and view all the answers

What entry should be made to recognize the loss and adjust for the sell transaction of securities in Year 1 and Year 2?

<p>Debit OCI for loss and credit allowance for securities fair value adjustments.</p> Signup and view all the answers

What is the fair value of Penn Co.'s depreciable assets on January 2 of the current year?

<p>1040000</p> Signup and view all the answers

An investment in debt security is initially classified as available for sale if the entity intends to sell it in the near term.

<p>False</p> Signup and view all the answers

Which accounting method should be used for investments in voting stock enabling significant influence?

<p>Equity method</p> Signup and view all the answers

What is the accounting approach for available-for-sale securities when they are sold?

<p>Realized gain or loss is recognized in net income.</p> Signup and view all the answers

What is the necessary journal entry to adjust the carrying amount of Dragon, Inc.'s shares on December 31?

<p>Securities fair value adjustment = $500</p> Signup and view all the answers

What are trading securities primarily bought and held for?

<p>Sale in the near future</p> Signup and view all the answers

How are trading securities reflected on the balance sheet?

<p>At fair value</p> Signup and view all the answers

What is required for goodwill recognized?

<p>It must be amortized on a straight-line basis over 10 years.</p> Signup and view all the answers

How much common stock did H.E. Bird Company purchase of Dowland Corporation?

<p>40%</p> Signup and view all the answers

What is the income to be entered in accounting for the investment in Dowland?

<p>20k</p> Signup and view all the answers

An investor must adopt the equity method when it reaches significant influence.

<p>True</p> Signup and view all the answers

Under the equity method, cash dividends received from an investee decrease the investor's investment account.

<p>True</p> Signup and view all the answers

What happens if an investor can no longer be presumed to exert significant influence?

<p>It ceases to recognize its share of the undistributed earnings or losses.</p> Signup and view all the answers

What does a cash dividend represent under the equity method?

<p>Return of an investment</p> Signup and view all the answers

What is the premium on a bond purchased at a price greater than its face amount?

<p>Amount paid greater than face amount</p> Signup and view all the answers

What journal entry should Dragon, Inc. make to record its share of Wize's income?

<p>Investment in W = Income equity method 14k</p> Signup and view all the answers

How are trading securities recorded?

<p>Included in earnings.</p> Signup and view all the answers

Under the cost method, the investee's fair value is irrelevant.

<p>True</p> Signup and view all the answers

What is the cash surrender value of life insurance policies reported?

<p>In the noncurrent asset section of the balance sheet.</p> Signup and view all the answers

What is the effect of excess dividends received on the investor's investment account?

<p>Decrease in investment.</p> Signup and view all the answers

Any premium or discount on a bond is amortized using the __________ method.

<p>effective-interest</p> Signup and view all the answers

What should be included in the period's net income from available-for-sale securities?

<p>Only realized gains</p> Signup and view all the answers

How is equity method goodwill related to Jennie's acquisition of Katlee calculated?

<p>As the difference between the cost of the investment and the underlying equity in the fair value of the investee's net assets.</p> Signup and view all the answers

What is the total after-tax effect on comprehensive income of OCI's transactions?

<p>4,500.</p> Signup and view all the answers

Study Notes

Cash Reconciliation

  • Hilltop Co.'s bank statement balance is $54,200.
  • Adjustments include:
    • Bank service charge of $10 (subtract).
    • Insufficient funds check of $650 (subtract).
    • Outstanding checks of $1,500 (subtract).
    • Deposits in transit of $350 (add).
    • Incorrect recording of a check deposited for $125 as $152, adjusting need of $27 (add).
  • Net cash balance after reconciliation is $53,050.

Short-Term Investment in Bonds

  • Early Co. purchased a $1 million Thomas Co. bond for $910,000, yielding 10%.
  • Bond had a fair market value of $945,000 at year-end.
  • Unrealized holding gain calculations:
    • Carrying Amount: $910,000 + Amortization of $11,000 = $921,000.
    • Unrealized Gain: $945,000 (fair value) - $921,000 (carrying amount) = $24,000.

Formulas for Investments

  • Unrealized holding gain equals the change in fair value recognized in earnings.
  • Carrying amount is the initial cost plus amortization of bond discount.

Life Insurance and Cash Surrender Value

  • Key executive's life insurance classified as noncurrent assets.
  • Life insurance expense formula: Total premiums - (cash surrender value + dividends received).
  • Jann Co. reported cash surrender value of $3,200 after premium calculations.

Equity Method of Accounting

  • Investments at 20% or greater ownership interest may indicate significant influence, usually utilizing the equity method.
  • Adjustments made for differences between fair value of investee’s assets and carrying amount post-acquisition.
  • Warehouses and other depreciated assets require annual amortization reflected in investment accounts.

Trading vs. Available-for-Sale Securities

  • Trading securities are reported at fair value, with unrealized gains/losses recorded in earnings.
  • Available-for-sale securities held at cost but remeasured at fair value with unrealized gains/losses reported in OCI.

Classification of Securities

  • Held-to-Maturity securities are reported at amortized cost and classified based on intent and ability to hold until maturity.
  • Equity securities with no determinable fair value measured using the cost method.

Unrealized Gains and Losses

  • Losses on trading securities included in earnings; gains/losses on available-for-sale recorded in other comprehensive income until realized.
  • The fair value option allows for the reporting of financial assets and liabilities at fair value on balance sheets.

Financial Reporting of Securities

  • Held-to-maturity securities presented net of unamortized premiums or discounts; amortization affects interest income.
  • Various transactions involving securities lead to comprehensive income calculations, affecting balance sheets and income statements.

Cash and Fair Value Adjustments

  • Cash acts as a standard for valuations in financial statements.
  • Fair value adjustments for treasury notes reflect unrealized holding losses in earnings.

Goodwill Accounting for Private Companies

  • Goodwill is amortized straight-line over 10 years; this policy is applicable for private companies under specific alternatives provided by the FASB.

Significant Influence Through Ownership

  • Ownership reaching significant influence requires application of equity method, with adjustments based on investee's reported earnings and dividend distributions.
  • Investments are recorded based on ownership percentages, with gains, losses, and dividends impacting the investment value in financial statements.

Summary of Accounting Treatments

  • Diverse accounting treatments distinguish the nature of securities and their impact on financial reporting, influencing presentation in balance sheets and income statements.### Equity Method Overview
  • Under the equity method, an investor adjusts its share of an investee's earnings or losses to account for unrealized intraentity profits and losses from transactions not with third parties.
  • Dividends on cumulative preferred stock, declared or not, reduce the investor's share of earnings.

Cash Dividends Impact

  • Cash dividends received from the investee are treated as a return on investment under the equity method, credited to the investment and not affecting equity earnings.

Loss of Significant Influence

  • When significant influence is no longer presumed, the investor stops recognizing undistributed earnings or losses, recording shares as available-for-sale or trading securities.

Cost Method Characteristics

  • Investments are recorded at cost with unrealized fair value changes recognized only if they reflect nontemporary declines.
  • Dividends received from investees are recognized as income unless classified as liquidating dividends.

Journal Entry Examples

  • For a 35% investment in Wize Corp with earnings of $40,000, the share of income would amount to $14,000, recorded as an increase in investment.
  • A cash dividend from Sim Company of $5,000 will be recorded as an adjustment to the investment account.

Bonds and Valuation

  • Bonds are formal contracts requiring the issuer to pay interest at specified intervals, details outlined in an indenture.
  • Investments in bonds are reported at carrying amounts, classified as held-to-maturity, available-for-sale, or trading.
  • Any unrealized gains or losses on bonds are recorded in a valuation allowance while the investment's amortized cost basis is used for premium or discount amortization.

Effective Interest Method

  • Premiums or discounts on bonds are amortized using the effective interest method, with the straight-line method used only when results are not materially different.

Cash Surrender Value

  • The cash surrender value of life insurance for key executives is listed in noncurrent assets, typically including a value schedule.

Income Statement Impact from Investments

  • For investors receiving dividends exceeding their share of investee earnings, the investment account decreases under both cost and equity methods as it indicates a return of investment.
  • Only realized gains from available-for-sale securities are included in net income; unrealized holding gains are reported as other comprehensive income.

Equity Method and Changes in Ownership

  • An investor recognizes share of the investee’s income only when the ownership percentage grants significant influence, applying the equity method from that point onward.

Comprehensive Income Calculations

  • Holding gains on available-for-sale securities affect comprehensive income, with after-tax adjustments necessary for accurate reporting.

Trading Securities Definition

  • Trading securities are primarily held for sale in the near term, affecting earnings through unrealized fair value changes.

Adjustments in Net Income

  • Any unrealized holding gains on trading securities and distributions that don't affect net income should align with earnings for accurate financial statements.
  • Asset divestments and subsequent accounting changes require proper adjustments to ensure accurate reporting in interim periods.

Bank Reconciliation Insights

  • In a bank reconciliation, balance adjustments include verifying outstanding checks and deposits in transit without affecting already accounted items like NSF checks or bank service charges.

Investor's Share with the Equity Method

  • The investment account is adjusted post-acquisition based on the investor's share of the investee's earnings, losses, and dividends, impacting overall investment valuation directly.### Equity Method and Investment Income
  • Amortization of goodwill under the equity method does not impact investment income.
  • Equity method goodwill is not assessed for impairment separately from the investment.
  • Cash dividends received from the investee do not influence equity-based earnings; they are recorded as debit to cash and credit to the investment.

Bond Investment and Carrying Amount

  • Long-term bond investments purchased at a premium result in a higher carrying amount if amortized using the effective interest method.
  • Bonds bought at a premium will decrease in carrying amount as the premium is amortized over time.

Bond Accounting Details

  • The carrying amount of a bond acquired at a premium begins above the maturity amount and decreases as the premium is amortized.
  • Under the effective interest method, interest revenue is calculated as the product of the carrying amount at the start of the period and the yield.
  • The straight-line method amortizes the premium evenly across the bond's life.

Specific Bond Purchase Example

  • Purl Corp purchased Shaw, Inc. bonds with a face amount of $500,000 and paid $456,200, aiming for a yield of 10%.
  • By December 31, Year 2, the reported amount for these bonds should be $468,000.

Life Insurance Proceeds

  • Gar Corp collected $300,000 from a life insurance policy upon the controller's death, which is tax-exempt.
  • The recognized revenue for Year 1 is calculated as $300,000 minus the cash value of the policy at the time of death, resulting in $210,000.

Life Insurance Cash Surrender Value

  • An increase in cash surrender value of a life insurance policy is recorded as an increase in cash surrender and a decrease in expense.

FASB Guidance

  • The Financial Accounting Standards Board (FASB) indicates when the equity method of accounting is no longer appropriate for investments.

Detailed Bond Purchase Calculation

  • Company C's purchase of Company D bonds involved multiple calculations using present value factors, resulting in a reported carrying amount decrease over time.
  • The calculations resulted in an amortized discount and interest revenue derived from the bond yield.

Investment Holdings and Valuation

  • Held-to-maturity securities are accounted for at amortized cost; for example, Security ABC was reported at its purchase cost of $100,000.
  • Trading securities like Security DEF must be reported at fair value, while available-for-sale securities are also recognized at fair value, with unrealized gains or losses affecting comprehensive income.

Investments with Significant Influence

  • Acme's investment in Kern Co. surpassed its purchase price by incorporating earnings and dividends under the equity method.
  • Conversely, Acme's investment in Wand Co. did not provide significant influence and was treated under fair value accounting with no equity earnings inclusion.

Compensating Balance Reporting

  • Compensating balances tied to long-term loans must be recorded as noncurrent assets and affect the effective interest rate of borrowings.
  • The presentation classification depends on the term of the loan and restrictions associated with the balance.

Certificate of Deposit Treatment

  • Certificates of deposit are not considered cash equivalents unless they have a maturity of three months or less.

Bond Interest Definitions

  • Bond coupon represents the interest calculated on the bond's face value.
  • Interest received is based on the bond's face value multiplied by the coupon rate, whereas interest revenue corresponds to the cost multiplied by the yield rate.

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Test your knowledge of cash reconciliation processes with these flashcards. Learn about bank statements, outstanding checks, and adjustments necessary for accurate financial reporting. Perfect for accounting students or professionals looking to refresh their skills.

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