ExpertMedium1 markMultiple Choice
CPA · Question 15 · Area II: Balance Sheet Accounts
On December 31, Year 1, Gem Co. holds the following:<br/>- Checking account balance: $50,000<br/>- Treasury bill (purchased Dec 1, Year 1, maturing Feb 28, Year 2): $20,000<br/>- Treasury bond (purchased Mar 1, Year 1, maturing Feb 28, Year 2): $30,000<br/>- Restricted cash (for bond sinking fund, non-current): $10,000<br/><br/>What amount should be reported as Cash and Cash Equivalents on the Balance Sheet?
On December 31, Year 1, Gem Co. holds the following:<br/>- Checking account balance: $50,000<br/>- Treasury bill (purchased Dec 1, Year 1, maturing Feb 28, Year 2): $20,000<br/>- Treasury bond (purchased Mar 1, Year 1, maturing Feb 28, Year 2): $30,000<br/>- Restricted cash (for bond sinking fund, non-current): $10,000<br/><br/>What amount should be reported as Cash and Cash Equivalents on the Balance Sheet?
Answer options:
A.
$110,000
B.
$70,000
C.
$80,000
D.
$100,000
How to approach this question
Cash Equivalents definition: Short-term, highly liquid investments with ORIGINAL maturity of 3 months or less from the DATE OF PURCHASE.
Full Answer
B.$70,000✓ Correct
1. Checking account: Cash ($50,000).<br/>2. T-Bill: Purchased Dec 1, matures Feb 28. Duration = 3 months. Qualifies as Cash Equivalent ($20,000).<br/>3. T-Bond: Purchased Mar 1, matures Feb 28 (next year). Duration = 12 months. Does NOT qualify (Original maturity > 3 months).<br/>4. Restricted Cash: Non-current classification ($0).<br/>Total = $50,000 + $20,000 = $70,000.
Common mistakes
Classifying investments based on remaining maturity rather than original maturity; including restricted cash.
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