[Anonymous]

126. Hill City’s water utility fund held the following investments in US Treasury securities at June 30, 2012:

Investment Date purchased Maturity date Carrying amount

Three-month T-bill 5/31/12 7/31/12 $30,000

Three-year T-note 6/15/12 8/31/12 $50,000

Five-year T-note 10/1/08 9/30/13 $100,000

In the fund’s balance sheet, what amount of these investments should be reported as cash and cash equivalents at June 30, 2012?

a. $0

b. $ 30,000

c. $ 80,000

d. $180,000

Explanation

Choice “c” is correct. Cash equivalents are short-term, highly liquid investments that are both readily convertible to known amounts of cash and so near their maturity that they present insignificant risk of changes in interest rates. Generally, only investments with original maturities of 3 months or less qualify as cash equivalents. Original maturity is determined from the date an investment was purchased by the reporting entity, not the date of issuance of the security. Both the 3-month $30,000 T-bill and the 3-year $50,000 T-note mature in 3 months or less from the date purchased, for a total cash equivalents of $80,000.

Choice “a” is incorrect. Cash equivalents include investments with original maturities (from date purchased) of 3 months or less.

Choice “d” is incorrect. Cash equivalents include investments with original maturities (from date purchased) of 3 months or less. The 3-year T-note has a 2 ½ month maturity from the date purchased so it qualifies as a cash equivalent.

Choice “b” is incorrect. The $100,000 5-year T-note has a 5-year maturity from the date purchased. To qualify as a cash equivalent, it must mature in 3 months or less from the date purchased.

So I don’t understand why it includes the $50,000, that is a 3 year note. I understand why we leave out the $100,000 and include the $30,000. Just not sure why the $50,000.

Please explain, another example would help greatly?

[rzrbkfaith]

They tried to trick you by labeling it a 3 year T-note. If you look at the purchase date and maturity date, you will see it has an original maturity of 3 months or less (because the purchase date was 6/15/12 and the maturity date was 8/31/12).

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[Author]

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