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Chapter 7: Q3Q (page 362)

Define a 鈥渃ompensating balance.鈥� How should a compensating balance be reported?

Short Answer

Expert verified

The minimum balance required by the customers of financial institutions in their respective accounts is called compensatory balance. It is reported as cash and cash equivalents under the current assets side for short-term borrowings and as investments or other assets under the non-current assets side for long-term borrowings.

Step by step solution

01

Meaning of Compensating Balance

The SEC (Security and Exchange Commission) has stated in its guidelines that customers of financial institutions are required to maintain minimum balances in their accounts to help the institutions avoid misleading investors or customers.

02

Recording of compensating balance

A company can record the compensating balance in two different ways, such as short-term borrowings and long-term borrowings, depending on the duration of the period. Short-term borrowings are reported as part of current assets, whereas long-term borrowings are reported as part of non-current under the head of assets on the balance sheet.

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Most popular questions from this chapter

(Notes Receivable Journal Entries) On December 31, 2017, Oakbrook Inc. rendered services to Beghun Corporation at an agreed price of \(102,049, accepting \)40,000 down and agreeing to accept the balance in four equal installments of $20,000 receivable each December 31. An assumed interest rate of 11% is imputed.

Instructions

Prepare the entries that would be recorded by Oakbrook Inc. for the sale and the receipts and interest on the following dates (prepare an amortization schedule). (Assume that the effective-interest method is used for amortization purposes.)

(a) December 31, 2017.

(b) December 31, 2018.

(c) December 31, 2019.

(d) December 31, 2020.

(e) December 31, 2021.

On October 1, 2017, Chung, Inc. assigns \(1,000,000 of its accounts receivable to Seneca National Bank as collateral for a \)750,000 note. The bank assesses a finance charge of 2% of the receivables assigned and interest on the note of 9%. Prepare the October 1 journal entries for both Chung and Seneca.

(Journalizing Various Receivable Transactions) The trial balance before adjustment for Phil Collins Company shows the following balances.

Debit

Credit

Accounts receivables

\(82,000

Allowance for doubtful accounts

\)2,120

Sales revenue

\(430,000

Instructions

Using the data above, give the journal entries required to record each of the following cases. (Each situation is independent.)

1. To obtain additional cash, Collins factors without recourse \)25,000 of accounts receivable with Stills Finance. The finance charge is 10% of the amount factored.

2. To obtain a 1-year loan of \(55,000, Collins pledges \)65,000 of specific receivable accounts to Crosby Financial. The finance charge is 8% of the loan; the cash is received and the accounts turned over to Crosby Financial.

3. The company wants to maintain the Allowance for Doubtful Accounts at 5% of gross accounts receivable.

4. Based on an aging analysis, an allowance of \(5,800 should be reported. Assume the allowance has a credit balance of \)1,100.

Kraft Enterprises owns the following assets at December 31, 2017.

Cash in bank 鈥� saving account

68,000

Checking account balance

17,000

Cash on hand

9,300

Post-dated Checks

750

Cash refunded due from IRS

31,400

Certificate of deposits (180-days)

90,000

What amount should be reported as cash?

What are two methods of recording accounts receivable transactions when a cash discount situation is involved? Which is more theoretically correct? Which is used in practice more of the time? Why?
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