Cash Equivalents

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    Topic
  • #224514
    Maher Hussien
    Participant

    Hi
    How Come the Treasury has more thank 3 months ?????
    1- maturing Feb. 28, 20X6 (31.12.20×5..to .to 28.2.20×6 ) is about 31+28=59 days
    2- maturing Mar. 31, 20X6 (31.12.20×5..to .to 31.3.20×6 ) is about 31+28+31 =90 days

    5. Question ID: CMA1 M1 Q59 (Topic: Cash)
    Trans Co. had the following balances at December 31, 20X5:

    Cash in checking account $ 35,000
    Cash in money market account 75,000
    U.S. Treasury bill, purchased Nov. 1, 20X5, maturing Feb. 28, 20X6 350,000
    U.S. Treasury bill, purchased Dec. 1, 20X5, maturing Mar. 31, 20X6 400,000
    Trans’s policy is to treat as cash equivalents all highly-liquid investments with a maturity of three months or less when purchased. What amount should Trans report as cash and cash equivalents in its December 31, 20X5 balance sheet?

    A. $110,000.correct
    B. $385,000.
    C. $460,000.
    D. $860,000.wrong
    Correct Answer Explanation for A:

    Only the cash in the checking account ($35,000) and the cash in the money market account ($75,000) are classified as cash and cash equivalents. Both U.S. Treasury bills had a maturity of more than three months when they were acquired and therefore do not meet the definition of cash equivalents, although they are current assets. Cash and cash equivalents on the balance sheet will be $110,000.

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  • #224523
    Lynn Roden
    HOCK international

    Hi Maher Hussien,

    The $350,000 U.S. Treasury bill was purchased on November 1, 20X5 and its maturity date is February 28, 20X6. Therefore, on the date when it was purchased, it had approximately four months to go until its maturity date: 30 days in the full month of November plus 31 days in the full month of December plus 31 days in the full month of January plus 27 days from February 1 through February 27, or 119 days in total. (Since the T-bill matures on February 28, the maturity date of February 28 is not included in the total number of days because as of the end of the day on February 28, the T-bill is matured and off the books.)

    The $400,000 U.S. Treasury bill was purchased on December 1, 20X5 and its maturity date is March 31, 20X6. Therefore, on the date when it was purchased, it also had approximately four months to go until its maturity date: 31 days in the full month of December plus 31 days in the full month of January plus 28 days in the full month of February plus 30 days from March 1 through March 30, or 120 days in total. (March 31 is not included in the total number of days since that is the maturity date of the T-bill.)

    Lynn

    #224532
    Maher Hussien
    Participant

    Yes But the Question Asking to report the cash Equlivanets on 31.12.20 “What amount should Trans report as cash and cash equivalents in its December 31, 20X5 balance sheet?”

    thanks

    #224535
    Lynn Roden
    HOCK international

    Hi Maher Hussien,

    That is correct. And on December 31, 2005, those two Treasury Bills are classified as current assets, but they are not classified as cash equivalents because when they were each purchased, they were not within three months of their maturity dates.

    Since the Treasury Bills are not classified as cash equivalents (and are also not cash), the amount reported as cash and cash equivalents in the December 31, 20X5 balance sheet is only the cash in the checking account of $35,000 and the cash in the money market account of $75,000, for a total of $110,000.

    Lynn

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