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Hello! I have a doubt in this question which relates to Cash in Transit.
Plastik had a trade receivable balance owing from Subtrak of $1·2 million as at 30 September 2014. This differed to the equivalent trade payable of Subtrak due to a payment by Subtrak of $400,000 made in September 2014 which did not clear Plastik’s bank account until 4 October 2014. Both companies have overdrafts rather than positive cash balances.
The answer is –
Current Assets – 9000 + 4000 – 120 (PUP) – 400 ( CIT ) – 800 ( Intra group )
Current Liabilities- 7900 + 4400 – 400 ( CIT ) – 800 ( Intra group )
I understood the Intra group part in the answer but I’m not getting why 400 is only subtracted from CA when you’re supposed to increase it by 400 as cash is received.
Also, why has 400 been deducted from CL too? Because a CIT entry is just DR Cash CR Receivables right?
Hi,
You are right with your double entry for the cash in transit but the key is in the wording of the question………
A debit entry to cash would increase the cash balance but if the company’s bank balance is overdrawn then the receipt of cash will reduce the overdraft and therefore the current liabilities. A nasty one from the examiner and one that hasn’t been seen very regularly, thankfully!
Thanks
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