Lesson details
- Estimated study time
- 1 hr 30 min
Learning objectives (6)
Begin with separate questions
Ask whether the entity controls the amount, whether it can withdraw or convert it, and whether another party or management limits its use. For an investment, record the acquisition date, maturity date, conversion amount, value risk, and the entity's cash-equivalent policy. A short remaining term at year-end does not replace the original-maturity fact.
Next record the restriction source, amount, purpose, release condition, and expected release date. These facts decide availability and current or noncurrent presentation. They are separate from the cash-flow statement's combined beginning-to-ending population.
Test a compensating balance twice
A compensating balance can restrict a deposit and reduce the proceeds a borrower can use. If a bank lends $500,000 at 6% and requires $50,000 to remain on deposit, annual interest is $30,000 while usable proceeds are $450,000. The Dividing $30,000 of annual interest by the $450,000 usable proceeds gives a simple effective rate of 6.67%. Preserve the contract and disclosure facts; the arithmetic does not decide whether the arrangement legally restricts withdrawal.
Exit check
Explain why a two-month remaining term is insufficient evidence for cash- equivalent classification. Then state where a four-year restriction appears and why its location does not by itself remove the amount from the cash-flow reconciliation.