ACC 110 Lecture Notes - Income Statement, Current Asset, Petty Cash

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Published on 6 Oct 2012
School
Ryerson University
Department
Accounting
Course
ACC 110
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CHAPTER 6
Cash, Receivables, and the Time Value of Money
EXERCISES
E6-1.
a. This item should be included in cash and cash equivalents because cash in the safe
is readily available for use.
b. This item should be included in cash and cash equivalents because it can be
converted quickly and easily into a known amount of cash.
c. This item could be categorized as a cash equivalent as it appears to represent a
source of funds the company uses to help manage its cash. Only the amount
borrowed is included. The unborrowed portion of the line isn’t included in cash and
cash equivalents.
d. Receivables aren’t included in cash and cash equivalents, whether they are current
or non-current.
e. Because the GIC matures in 18 months it shouldn’t be classified as cash and cash
equivalents. The GIC might be convertible to cash at any time but the amount of
cash it would realize would very depending on the time.
f. This item shouldn’t be included in cash and cash equivalents as it’s being held by a
foreign government. It’s not available for the entity to use.
g. This item should be included in cash and cash equivalents as it’s cash in the entity’s
bank account.
h. The post-dated cheques should be included in cash and cash equivalents as they
will be realized in cash within three months. There is risk the cheques won’t be
honoured but if the risk is small classification as cash and cash equivalents is
reasonable.
i. This item shouldn’t be included in cash and cash equivalents. Since the cash is held
by the lawyer for a specific purpose, it’s restricted. Restricted cash isn’t readily
available for use. The restricted cash would be disclosed separately on the financial
statements.
j. This item should be included in cash and cash equivalents. While the pounds can’t
be converted into a known amount of Canadian cash, they can be converted quickly
and easily and are readily available for use. Also, if the pounds are used to pay
obligations denominated in pounds, exchange isn’t an issue.
Copyright © 2010 McGraw-Hill Ryerson Ltd. 1
k. These items shouldn’t be included in cash and cash equivalents because the value
of publicly traded shares fluctuates daily. It’s uncertain how much cash would be
received for the shares until they were sold.
E6-3.
a. $100,000(1.02)18 = $142,825
b. $60,000(1.07)3 = $73,503
c. $10,000(1.05)15 = $20,789
d. $25,000(1.005)20 = $27,622
E6-5.
a. PV = 20,000/(1.12)5 = $11,349
You would prefer $20,000 in five years because the present value is of $20,000 to
be received in five years is greater than $10,000
b. PV = $32,000/(1.05)4 = $26,326 of revenue should be recognized. Revenue should
be the present value of the amount that will be paid.
c. PV = $20,000/(1.18)2 = $14,363.69
PV = $30,000/(1.18)4 = 15,473.67
PV = $50,000/(1.18)6 = 18,521 .58
Total = $48,358.94
The maximum that should be paid for this stream of cash flows is $48,358.94.
d. PV=$10,000/(1.08)15 = $3,152. You would pay a maximum of $3,152 for the zero
coupon bond.
e. PV = $30,000/(1.20)1 = $25,000
PV = $50,000/(1.20)2 = 34,722
PV = $70,000/(1.20)3 = 40,509
Total = $100,231
Yes, you would accept this investment because $100,000 is less than the present
value of the cash flows.
f. $1,610.51=$1,000 (1+x)5
x= 10%
E6-7.
a. Present value: $250,000 / (1.1)5 = $155,230 of revenue should be recognized.
b. Present value of an annuity:
1\.10*[1 – 1\(1 + .10)20] $250,000 = $2,128,391
c. Future value: $10,000*(1.1)8 = $21,436
Copyright © 2010 McGraw-Hill Ryerson Ltd. 2
d. Present value and present value of an annuity
i) $35,000/(1.1)5 = $21,732
ii) $2,000/(1.1)1 + $4,000/(1.1)2 + $6,000/(1.1)3 +$8,000/(1.1)4 +$10,000/(1.1)5 =
= $1,818 + 3,306 + 4,508 + 5,464 + 6,209
= $21,305
iii) 1/.10 [1 – 1/(1 + .10)5] $6,000 = $22,745
The investor should choose option 3 because it has the highest present value.
e. Future value: $10,000 (1.05)20 = $26,533
f. Present value of an annuity :
1/.1 [1 – 1/(1 + .1)25] x $5,000 = $45,385
$45,385 is the most the investor should pay.
g. Present value: $1,500/(1.1)3 = $1,127
$1,500 in three years would be the preferred alternative because the present value is
greater (present of the $1,000 payment now is $1,000).
E6-9.
a. Dr. Cash 2,500
Dr. Accounts receivable 7,000
Cr. Sales 9,500
b. Dr. Allowance for bad debts 7,000
Cr. Accounts receivable 7,000
c. Dr. Accounts receivable 7,000
Cr. Allowance for bad debts 7,000
Dr. Cash 7,000
Cr. Accounts receivable 7,000
E6-11
a.
$7,000,000 + $6,000,000 (1.14)-1 + $6,000,000 (1.14)-2 + $6,000,000 (1.14)-3
= $7,000,000 + 13,929,792
= $20,929,792
.
Cash 7,000,000
Accounts receivable 5,263,158
Long-term receivable 8,666,634
Revenue 20,929,792
Copyright © 2010 McGraw-Hill Ryerson Ltd. 3

Document Summary

Cash, receivables, and the time value of money. E6-1. a. b. c. d. e. f. g. h. i. This item should be included in cash and cash equivalents because cash in the safe is readily available for use. This item should be included in cash and cash equivalents because it can be converted quickly and easily into a known amount of cash. This item could be categorized as a cash equivalent as it appears to represent a source of funds the company uses to help manage its cash. The unborrowed portion of the line isn"t included in cash and cash equivalents. Receivables aren"t included in cash and cash equivalents, whether they are current or non-current. Because the gic matures in 18 months it shouldn"t be classified as cash and cash equivalents. The gic might be convertible to cash at any time but the amount of cash it would realize would very depending on the time.