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Financial Accounting: In an Economic Context by Jamie Pratt

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PROBLEMS

P6-1

Classifying cash on the balance sheet

On September 30, 2011, Print-O-Matic Inc. entered into an arrangement with its bank to borrow $250,000. The principal is due on October 1, 2016, and the note has a stated annual interest rate of 10 percent. Under the borrowing agreement, Print-O-Matic agreed to maintain a compensating balance of $60,000 in a non-interest-bearing account. As of December 31, 2011, Print-O-Matic has an additional $225,000 in various savings and checking accounts that earn an annual rate of 6 percent. The controller intends to classify the entire $285,000 in cash as a current asset.

REQUIRED:

a. Do you agree with the classification of the $285,000 of cash as a current asset? Explain your answer.

b. Print-O-Matic reported interest expense associated with this note for the year ended December 31, 2011, in the amount of $6,250 [($250,000 X 10%) × 1/4]. Do you agree with this classification? Should any other factors be considered in the interest cost? Explain.

P6-2

Cash discounts

During the month of March, QNI Corporation made the following credit sales and had the following related collections. QNI prepares financial statements for the first quarter of operations at the end of March.

March 3 Sold goods to AAA company for a gross price of $1,400. The terms of the sale were 2/10, n/30.
March 8 Sold goods to BBB company for a gross price of $800. The terms of the sale were 2/10, n/30.
March 11 Received full payment from AAA.
March 28 Received full ...

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