Cash and Cash Equivalents

1. Covenants

Note disclosure required for all covenants and restrictions

2. Cash and cash equivalents

Cash and cash equivalents are items that can readily be converted to cash. The line of credit has been in an overdraft position for a year. Normally, this would be shown as a separate line item as a current liability. However since there is a positive balances in a number of other accounts with the same bank it is acceptable to net those balances and the overdraft on the balance sheet. Assuming a positive balance it is acceptable to show a positive amount for cash and cash equivalents under current assets so current treatment is acceptable.

3. Purchases in U.S. dollars

The payables in U.S. dollars must be translated to Canadian dollars at the current exchange rate at the reporting date. Since, the Canadian dollar has been dropping this will create a foreign exchange loss which will be included in net income.

4. Note receivable

It is not appropriate to just transfer the amount of the accounts receivable to the same amount as a note receivable. Since, the note is over a two year period it must be discounted using the market rate of 8%. The amount of the note receivable will be

Note $500,000 (2 years, 8%) = $428,870 plus interest $20,000 (2 years, 8%) = $35,665 for a total of $464,535. This assumes that the interest payments are made at the end of each year. The note would be separated into the current portion of interest receivable due this year of $20,000 from the noncurrent portion. The accounts receivable of $500,000 would have all been classified as current and will now be noncurrent. This will have a negative impact on the current ratio. There is also a need to record the remaining

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