Section 2,3

accounting for specialized establishments accounting

True or False Questions

No. Question Answer Citation & Explanation
Customers’ deposits are Deposits represent the major liability
1 considered the major liability of True of a bank and are the most important
a bank. source of finance.
The proceeds from the sale of assets
In the event a bank is liquidated, must first be used to pay off the
stockholders receive whatever claims of its depositors; only after
2 False
funds remain before depositors that do other creditors and
are paid off. stockholders receive whatever funds
remain.
Demand Deposit Accounts
(DDA), such as regular checking
Such accounts cannot pay any
3 accounts, are prohibited from True
explicit (determined) interest rate.
paying any explicit (determined)
interest rate.
Since depositors have unlimited
Saving Deposit Accounts
freedom to add or withdraw funds,
generally bear or involve the
4 False these deposits generally bear or
highest rate of interest offered to
involve the lowest rate of interest
depositors by a bank.
offered by a bank.
Non-transaction accounts, often
called money market deposit The bank must deserve the right to
accounts (MMDA), must allow require seven days’ notice before
5 True
the bank the right to require any withdrawals are made for
seven days’ notice before any MMDAs.
withdrawals are made.
A CD is evidenced or documented
A Certificate of Deposit (CD) is
by an instrument called a Certificate.
evidenced in the form of a
6 False A Time Deposit (not a CD) is
written contract rather than a
evidenced in the form of a written
certificate.
contract.
Cash on Hand is considered an Cash is a non-earning or
earning asset that provides a unprofitable asset, and any excess
7 False
source of income for paying must be invested in earning assets to
bank charges. produce income.
The Legal Reserve, which is part
The Legal Reserve is required by
of the balance at the Central
8 False law and may not be invested.
Bank, may be loaned overnight
Amounts in excess of required
to other financial institutions.
 reserves are available to be loaned
overnight.
Cash Items in the process of
These items include mainly
collections include items like
uncollected checks, maturing interest
9 uncollected checks, redeemed True
coupons, checks, redeemed
government saving bonds, and
government saving bonds, etc..
maturing interest coupons.
Changes between components of
the cash pool (e.g., transferring These changes affect the relative
liquid cash to the Central Bank) size of the components, but none of
10 True
affect the relative size of the these types of transactions change
components but do not change the size of the total cash pool.
the total size of the cash pool.
If a customer deposits currency The cash pool increases, and hence
to their current account, the cash the total of assets is increased. The
11 False
pool decreases and total liability account (demand deposit
liabilities increase. account) also increases.
Banks strive to keep the size of cash
Banks strive to keep the size of
as low as possible, since cash
12 cash as high as possible to False
balances earn little or no interest
maximize liquidity.
income.
Interest expense on saving and
Interest expense on saving and time
time deposits should be recorded
13 False deposits should be recorded during
only when the interest is paid to
the period of deposit.
the depositors.
NOW accounts (Negotiable
These accounts can be held by
Order of Withdrawal) are
14 True individuals and not-for-profit
restricted to individuals and not-
making organisations.
for-profit making organisations.
Customers must wait until the The customer must wait until the
maturity date of a Time Deposit maturity date or pay a penalty for
15 True
Account, or they risk paying a early withdrawal (lose accrued
penalty for early withdrawal. interest).
The majority of deposit
transactions are typically The majority of deposit transactions
16 processed by the bank’s internal False into and out of these accounts are
accounting department rather processed by tellers.
than by tellers.
The interest paid on saving
Interest on these accounts is usually
deposit accounts is usually paid
17 False added to the saving deposit account
in cash rather than added to the
rather than paid in cash.
saving deposit account.
Daily Reconciliation of the Cash
Pool involves reconciling cash Each teller reconciles and verifies
18 inflows and outflows with True cash flows to discover and rectify
beginning and ending balances of errors.
cash to discover errors.
 In the journal entry for an "on us"
check payment, the checking
When a customer cashes an "on
account is debited (Example:
us" check (drawn on the bank),
Illustration in Chapter Two,
19 the bank debits the customer's True
transaction Jan. 8, where a checking
Demand Deposit Account
account is debited for a loan
(Checking Account).
repayment check drawn on the
bank).
Balances at other Banks may These deposits may take the form of
take the form of demand or time demand or time deposits and thus
20 True
deposits and provide different provide different degrees of
degrees of liquidity. liquidity.

Multiple Choice Questions

No. Question Options Citation
a) High liquidity ratios. b) High
percentage of liabilities, including
What characteristic makes
deposits, compared to stockholders’
1 banks considered highly
equity. c) Small amount of cash on
levered enterprises?
hand. d) High percentage of earning
assets.
Which of the following is the
most common withdrawal a) Debit cards. b) Checks. c) Written
2
instrument for Demand contracts. d) Wire transfers.
Deposit Accounts?
Which type of deposit
account is defined by the
a) Demand Deposit Account. b) Saving
customer having unlimited
Deposit Account. c) Certificate of
3 freedom to add to or
Deposit. d) Money Market Deposit
withdraw from the account,
Account.
but generally bears the lowest
interest rate?
Which example is listed as a
a) NOW account. b) Cashier’s checks.
type of Official Bank Check
4 c) Passbook accounts. d) Treasury
(a Demand Deposit Account
notes.
example)?
a) Time Deposits do not pay interest. b)
What is the major Time Deposits have a specific
characteristic differentiating maturity date. c) Time Deposits are
5
Time Deposit Accounts from documented by a Passbook. d) Time
Saving Deposit Accounts? Deposits have unlimited withdrawal
freedom.
a) Cannot earn interest. b) Require a
Money Market Deposit
6 written contract for documentation. c)
Accounts (MMDA) offer
Can earn interest offered by the
 limited check-writing bank. d) Are only for non-profit
privileges and: making organizations.
a) Balances at other Banks. b) Balance
Which item of cash in a
at the Central Bank. c) Cash Items in
7 bank's pool is considered the
the process of collections. d) Cash on
ultimate liquidity?
Hand (Currency and Coins).
What term describes the
portion of a bank’s cash a) Legal Reserve. b) Liquid optional
balance at the Central Bank reserve (Excess reserve funds). c)
8
that is available to be loaned Cash Items in the process of
overnight or over the collections. d) Clearing funds.
weekend to other banks?
Amounts due from banks a) A decrease in stockholders’ equity.
provide a source of cash b) An increase in Legal Reserve. c)
9
inflows, while amounts due to Deposit of collateral. d) Cash outflows
banks may require: at some time in the future.
If a bank transfers liquid cash
a) Currency and Coins. b) Due from
(Currency and Coins) to the
Banks-Central Bank. c) Demand
10 Central Bank, which account
Deposit Accounts. d) Due from Banks-
is debited in the general
Bank X.
journal?
When a customer transfers
a) It increases by L.E. 20,000. b) It
L.E. 20,000 from their
decreases by L.E. 20,000. c) It
checking account (DDA) to
11 remains unchanged (reclassification
their saving account, what is
of liabilities). d) It increases total
the effect on the bank's total
assets.
cash pool?
When a customer redeems a
government saving bond for a) Debited for L.E. 5,000. b) Credited
L.E. 5,000 and the amount is for L.E. 5,000. c) Increased, but only
12
credited to the customer’s after two days. d) Credited for the full
NOW account, the liability amount plus interest.
account NOW accounts is:
When a bank receives in-
clearings (checks drawn on a) Due from Banks - Central Bank.
this bank cleared through the b) Cashier’s checks. c) Currency and
13
Central Bank), what account Coins. d) Demand deposit accounts
reflects the decrease in the (the liability is debited).
bank's assets?
a) Paid in cash monthly. b) Paid by
How is interest on saving separate interest check quarterly. c)
deposit accounts usually paid Added to the saving deposit account
14
to the customer, according to periodically (e.g., quarterly). d)
the sources? Credited to the checking account
immediately.
 Which control procedure
involves individuals a) Daily Reconciliation of Cash Pool.
15 responsible for handling cash b) Surprise Audit. c) Separation of
having no access to the Duties. d) Daily Reports.
recording process?
a) To prepare for Surprise Audits. b)
What is the stated purpose of
To record interest accruals. c) To
preparing daily balance sheets
16 facilitate check clearings. d) To
and cash reports for
provide information for the control
management use in banks?
of liquidity and exposure to risk.
If a customer pays for a loan
a) Demand deposit account. b)
repayment using an "on us"
Currency and Coins. c) Loans (Asset
17 check (a check drawn on the
account). d) Loans (Asset account, as
bank), which account is
shown in solution for Jan. 8).
credited?
When a customer purchases a
new Certificate of Deposit
a) Certificate of Deposit. b) Currency
(CD) by transferring funds
18 and Coins. c) Saving deposit
from their existing Saving
accounts. d) Demand deposit accounts.
Account, which account is
debited?
a) Transferring cash to the Central
What type of transaction is
Bank. b) Collection of cash from other
recorded as "No entry is
banks. c) Transferring liquid cash
19 required" in the general
from the main office to a branch
journal because only the
office. d) Customer deposit of
location of cash changed?
currency.
a) Certificate of Deposit and Demand
If a customer has a Certificate
Deposit Account. b) Cashier’s check
of Deposit mature and uses
(liability) and possibly other
the proceeds to purchase a
20 accounts like DDA or Cash,
Cashier's Check, what
depending on distribution. c) Interest
accounts are credited in the
Expense and Certificate of Deposit. d)
bank's books?
Currency and Coins.

Exercises
Exercise 1: Deposit and Withdrawal Transactions

Based on selected transactions from the sources, prepare the required journal entries.

Date Transaction
A customer transfers L.E. 60,000 from his/her checking account to a saving
A
account.
B A customer pays his/her loan by L.E. 70,000 cash at the teller window.
A customer withdraws L.E. 90,000 from a saving account and receives cash for
C
L.E. 35,000 and a cashier’s check for L.E. 55,000.
Instructions: Prepare the journal entries for the above transactions.

Exercise 1 Answer Key

Dr. Cr.
Date Explanation Citation
L.E. L.E.
A Demand deposit account (Checking account) 60,000
Saving account 60,000
To record fund transfer between customer accounts.
B Currency and Coins (Cash) 70,000
Loans 70,000
To record loan payment received in cash.
C Saving deposit accounts 90,000
Currency and Coins (Cash) 35,000
Cashier’s check 55,000
To record withdrawal from saving account partially
paid in cash and a cashier’s check.

Exercise 2: Accrual and Payment of Interest on Saving Deposits

Interest on saving deposit accounts is computed and recorded monthly, and paid to the
customer quarterly by adding the amount to the customer’s saving deposit account.
The following are the amounts of interests accrued for the second quarter of the year:

• April: L.E. 1,200,000

• May: L.E. 1,300,000
• June: L.E. 1,500,000
• Total Quarterly Interest: L.E. 4,000,000

Instructions: Journalize the accrual of interest on saving deposit accounts for April,
May, and June, and journalize the payment of interest to customers at the end of the
second quarter.

Exercise 2 Answer Key

Date Explanation Dr. L.E. Cr. L.E. Citation

Apr.
Interest expense - saving deposits 1,200,000
30
Interest payable - saving D 1,200,000
Accrual of interest for April.
May
Interest expense - saving deposits 1,300,000
31
Interest payable - saving D 1,300,000
 Accrual of interest for May.
Jun.
Interest expense - saving deposits 1,500,000
30
Interest payable - saving D 1,500,000
Accrual of interest for June.
Jun. Interest payable - saving deposits (1.2M +
4,000,000
30 1.3M + 1.5M)
Saving deposit accounts 4,000,000
To record payment of interest by crediting
interest directly to saving deposit accounts.

Clarification Analogy:

Understanding the difference between the two types of changes affecting a bank’s
cash pool (Chapter Two) can be compared to managing water in a municipal system.
Type 1 (Changes between components), like transferring cash from the main office
to a branch, is like moving water from a large central reservoir tank to smaller
localized storage tanks—the total amount of water in the entire system stays the same,
only its location (or classification) changes. Type 2 (Changes in the size of the cash
pool), like a customer depositing currency, is like rain adding water to the entire
system—both the total water level (assets) and the city's obligation to its residents
(liabilities) increase simultaneously.