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Chapter7: Cash and Receivables

Exercises

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An alternate exercise and problem set is available on the text website: www.mhhe.com/spiceland6e

E 7-1
 
Cash and cash equivalents; restricted cash
 
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The controller of the Red Wing Corporation is in the process of preparing the company's 2011 financial statements. She is trying to determine the correct balance of cash and cash equivalents to be reported as a current asset in the balance sheet. The following items are being considered:

a.

 

Balances in the company's accounts at the First National Bank; checking $13,500, savings $22,100.

b.

 

Undeposited customer checks of $5,200.

p. 377

c.

 

Currency and coins on hand of $580.

d.

 

Savings account at the East Bay Bank with a balance of $400,000. This account is being used to accumulate cash for future plant expansion (in 2013).

e.

 

$20,000 in a checking account at the East Bay Bank. The balance in the account represents a 20% compensating balance for a $100,000 loan with the bank. Red Wing may not withdraw the funds until the loan is due in 2014.

f.

 

U.S. Treasury bills; 2-month maturity bills totaling $15,000, and 7-month bills totaling $20,000.

Required:

1.

 

Determine the correct balance of cash and cash equivalents to be reported in the current asset section of the 2011 balance sheet.

2.

 

For each of the items not included in your answer to requirement 1, explain the correct classification of the item.

E 7-2
 
Cash and cash equivalents
 
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Delta Automotive Corporation has the following assets listed in its 12/31/11 trial balance:

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Required:

1.

 

Determine the correct balance of cash and cash equivalents to be reported in the current asset section of the 2011 balance sheet.

2.

 

For each of the items not included in your answer to requirement 1, explain the correct classification of the item.

E 7-3
 
Bank overdrafts
 
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Parker Inc. has the following cash balances:

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Required:

1.

 

Prepare the current assets and current liabilities section of Parker's 2011 balance sheet, assuming Parker reports under U.S. GAAP.

2.

 

Prepare the current assets and current liabilities section of Parker's 2011 balance sheet, assuming Parker reports under IFRS.

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E 7-4
 
Trade and cash discounts; the gross method and the net method compared
 
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Tracy Company, a manufacturer of air conditioners, sold 100 units to Thomas Company on November 17, 2011. The units have a list price of $600 each, but Thomas was given a 30% trade discount. The terms of the sale were 2/10, n/30.

Required:

1.

 

Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on November 26, 2011, assuming that the gross method of accounting for cash discounts is used.

2.

 

Prepare the journal entries to record the sale on November 17 (ignore cost of goods) and collection on December 15, 2011, assuming that the gross method of accounting for cash discounts is used.

3.

 

Repeat requirements 1 and 2 assuming that the net method of accounting for cash discounts is used.

E 7-5
 
Cash discounts; the gross method
 
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Harwell Company manufactures automobile tires. On July 15, 2011, the company sold 1,000 tires to the Nixon Car Company for $50 each. The terms of the sale were 2/10, n/30. Harwell uses the gross method of accounting for cash discounts.

Required:

1.

 

Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and collection on July 23, 2011.

2.

 

Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and collection on August 15, 2011.

E 7-6
 
Cash discounts; the net method
 
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[This is a variation of Exercise 7-5 modified to focus on the net method of accounting for cash discounts.]

   Harwell Company manufactures automobile tires. On July 15, 2011, the company sold 1,000 tires to the Nixon Car Company for $50 each. The terms of the sale were 2/10, n/30. Harwell uses the net method of accounting for cash discounts.

Required:

1.

 

Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and payment on July 23, 2011.

2.

 

Prepare the journal entries to record the sale on July 15 (ignore cost of goods) and payment on August 15, 2011.

p. 378

E 7-7
 
Sales returns
 
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Halifax Manufacturing allows its customers to return merchandise for any reason up to 90 days after delivery and receive a credit to their accounts. The company began 2011 with an allowance for sales returns of $300,000. During 2011, Halifax sold merchandise on account for $11,500,000. This merchandise cost Halifax $7,475,000 (65% of selling prices). Also during the year, customers returned $450,000 in sales for credit. Sales returns, estimated to be 4% of sales, are recorded as an adjusting entry at the end of the year.

Required:

1.

 

Prepare the entry to record the merchandise returns and the year-end adjusting entry for estimated returns.

2.

 

What is the amount of the year-end allowance for sales returns after the adjusting entry is recorded?


E 7-8
 
Uncollectible accounts; allowance method vs. direct write-off method
 
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Johnson Company uses the allowance method to account for uncollectible accounts receivable. Bad debt expense is established as a percentage of credit sales. For 2011, net credit sales totaled $4,500,000, and the estimated bad debt percentage is 1.5%. The allowance for uncollectible accounts had a credit balance of $42,000 at the beginning of 2011 and $40,000, after adjusting entries, at the end of 2011.

Required:

1.

 

What is bad debt expense for 2011?

2.

 

Determine the amount of accounts receivable written off during 2011.

3.

 

If the company uses the direct write-off method, what would bad debt expense be for 2011?

E 7-9
 
Uncollectible accounts; allowance method; balance sheet approach
 
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Colorado Rocky Cookie Company offers credit terms to its customers. At the end of 2011, accounts receivable totaled $625,000. The allowance method is used to account for uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $32,000 at the beginning of 2011 and $21,000 in receivables were written off during the year as uncollectible. Also, $1,200 in cash was received in December from a customer whose account previously had been written off. The company estimates bad debts by applying a percentage of 10% to accounts receivable at the end of the year.

Required:

1.

 

Prepare journal entries to record the write-off of receivables, the collection of $1,200 for previously written off receivables, and the year-end adjusting entry for bad debt expense.

2.

 

How would accounts receivable be shown in the 2011 year-end balance sheet?

E 7-10
 
Uncollectible accounts; allowance method and direct write-off method compared; solving for unknown
 
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Castle Company provides estimates for its uncollectible accounts. The allowance for uncollectible accounts had a credit balance of $17,280 at the beginning of 2011 and a $22,410 credit balance at the end of 2011 (after adjusting entries). If the direct write-off method had been used to account for uncollectible accounts (bad debt expense equals actual write-offs), the income statement for 2011 would have included bad debt expense of $17,100 and revenue of $2,200 from the collection of previously written off bad debts.

Required:

Determine bad debt expense for 2011 according to the allowance method.

E 7-11
 
Uncollectible accounts; allowance method; solving for unknowns
 
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General Mills reported the following information in its 2009 financial statements ($ in millions):

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A note disclosed that the allowance for uncollectible accounts had a balance of $18 million and $16 million at the end of 2009 and 2008, respectively. Bad debt expense for 2009 was $14 million.

 Real World Financials

Required:

Determine the amount of cash collected from customers during 2009.

E 7-12
 
Note receivable
 
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On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000. In payment, Esquire agreed to accept a 6% note requiring the payment of interest and principal on March 31, 2012. The 6% rate is appropriate in this situation.

Required:

1.

 

Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), the December 31, 2011 interest accrual, and the March 31, 2012 collection.

2.

 

If the December 31 adjusting entry for the interest accrual is not prepared, by how much will income before income taxes be over- or understated in 2011 and 2012?

p. 379

E 7-13
 
Noninterest-bearing note receivable
 
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[This is a variation of Exercise 7-12 modified to focus on a noninterest-bearing note.]

   On June 30, 2011, the Esquire Company sold some merchandise to a customer for $30,000 and agreed to accept as payment a noninterest-bearing note with an 8% discount rate requiring the payment of $30,000 on March 31, 2012. The 8% rate is appropriate in this situation.

Required:

1.

 

Prepare journal entries to record the sale of merchandise (omit any entry that might be required for the cost of the goods sold), the December 31, 2011 interest accrual, and the March 31, 2012 collection.

2.

 

What is the effective interest rate on the note?

E 7-14
 
Interest-bearing note receivable; solving for unknown rate
 
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On January 1, 2011, the Apex Company exchanged some shares of common stock it had been holding as an investment for a note receivable. The note principal plus interest is due on January 1, 2012. The 2011 income statement reported $2,200 in interest revenue from this note and a $6,000 gain on sale of investment in stock. The stock's book value was $16,000. The company's fiscal year ends on December 31.

Required:

1.

 

What is the note's effective interest rate?

2.

 

Reconstruct the journal entries to record the sale of the stock on January 1, 2011, and the adjusting entry to record interest revenue at the end of 2011. The company records adjusting entries only at year-end.

E 7-15
 
Assigning of specific accounts receivable
 
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On June 30, 2011, the High Five Surfboard Company had outstanding accounts receivable of $600,000. On July 1, 2011, the company borrowed $450,000 from the Equitable Finance Corporation and signed a promissory note. Interest at 10% is payable monthly. The company assigned specific receivables totaling $600,000 as collateral for the loan. Equitable Finance charges a finance fee equal to 1.8% of the accounts receivable assigned.

Required:

Prepare the journal entry to record the borrowing on the books of High Five Surfboard.

E 7-16
 
Factoring of accounts receivable without recourse
 
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Mountain High Ice Cream Company transferred $60,000 of accounts receivable to the Prudential Bank. The transfer was made without recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10%. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $5,000) less a 2% fee (2% of the total factored amount).

Required:

Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

E 7-17
 
Factoring of accounts receivable with recourse
 
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[This is a variation of Exercise 7-16 modified to focus on factoring with recourse.]

   Mountain High Ice Cream Company transferred $60,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $5,000). Mountain High anticipates a $3,000 recourse obligation. The bank charges a 2% fee (2% of $60,000), and requires that amount to be paid at the start of the factoring arrangement.

Required:

Prepare the journal entry to record the transfer on the books of Mountain High assuming that the sale criteria are met.

E 7-18
 
Factoring of accounts receivable with recourse under IFRS
 
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[This is a variation of Exercise 7-17 modified to focus on factoring with recourse under IFRS.]

   Mountain High Ice Cream Company reports under IFRS. Mountain High transferred $60,000 of accounts receivable to the Prudential Bank. The transfer was made with recourse. Prudential remits 90% of the factored amount to Mountain High and retains 10% to cover sales returns and allowances. When the bank collects the receivables, it will remit to Mountain High the retained amount (which Mountain estimates has a fair value of $5,000). Mountain High anticipates a $3,000 recourse obligation. The bank charges a 2% fee (2% of $60,000), and requires that amount to be paid at the start of the factoring arrangement. Mountain High has transferred control over the receivables, but determines that it still retains substantially all risks and rewards associated with them.

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Required:

Prepare the journal entry to record the transfer on the books of Mountain High, considering whether the sale criteria under IFRS have been met.

E 7-19
 
Discounting a note receivable
 
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Selkirk Company obtained a $15,000 note receivable from a customer on January 1, 2011. The note, along with interest at 10%, is due on July 1, 2011. On February 28, 2011, Selkirk discounted the note at Unionville Bank. The bank's discount rate is 12%.

p. 380

Required:

Prepare the journal entries required on February 28, 2011, to accrue interest and to record the discounting (round all calculations to the nearest dollar) for Selkirk. Assume that the discounting is accounted for as a sale.

E 7-20
 
Concepts; terminology
 
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Listed below are several terms and phrases associated with cash and receivables. Pair each item from List A (by letter) with the item from List B that is most appropriately associated with it.

List A

List B


_____1.Internal control

a.Restriction on cash.

_____2.Trade discount

b.Cash discount not taken is sales revenue.

_____3.Cash equivalents

c.Includes separation of duties.

_____4.Allowance for uncollectibles

d.Bad debt expense as % of credit sales.

_____5.Cash discount

e.Recognizes bad debts as they occur.

_____6.Balance sheet approach

f.Sale of receivables to as financial institution.

_____7.Income statement approach

g.Include highly liquid investments.

_____8.Net method

h.Estimate of bad debts.

_____9.Compensating balance

i.Reduction in amount paid by credit customer.

_____10.Discounting

j.Reduction below list price.

_____11.Gross method

k.Cash discount not taken is interest revenue.

_____12.Direct write-off method

l.Bad debt expense determined by estimating realizable value.

_____13.Factoring

m.Sale of note receivable to a financial institution.


E 7-21
 
Receivables; transaction analysis
 
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Weldon Corporation's fiscal year ends December 31. The following is a list of transactions involving receivables that occurred during 2011:

Mar. 17

Accounts receivable of $1,700 were written off as uncollectible. The company uses the allowance method.

30

Loaned an officer of the company $20,000 and received a note requiring principal and interest at 7% to be paid on March 30, 2012.

May 30

Discounted the $20,000 note at a local bank. The bank's discount rate is 8%. The note was discounted without recourse and the sale criteria are met.

June 30

Sold merchandise to the Blankenship Company for $12,000. Terms of the sale are 2/10, n/30. Weldon uses the gross method to account for cash discounts.

July 8

The Blankenship Company paid its account in full.

Aug. 31

Sold stock in a nonpublic company with a book value of $5,000 and accepted a $6,000 non-interest-bearing note with a discount rate of 8%. The $6,000 payment is due on February 28, 2012. The stock has no ready market value.

Dec. 31

Bad debt expense is estimated to be 2% of credit sales for the year. Credit sales for 2011 were $700,000.

Required:

1.

 

Prepare journal entries for each of the above transactions (round all calculations to the nearest dollar).

2.

 

Prepare any additional year-end adjusting entries indicated.

E 7-22
 
Ratio analysis
 
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Microsoft Corporation reported the following information in its financial statements for three successive quarters during the 2009 fiscal year ($ in millions):  Real World Financials

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Required:

Compute the receivables turnover ratio and the average collection period for the second and third quarters. Assume that each quarter consists of 91 days.

E 7-23
 
Ratio analysis; solve for unknown
 
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The current asset section of the Moorcroft Outboard Motor Company's balance sheet reported the following amounts:

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   The average collection period for 2011 is 50 days.

Required:

Determine net sales for 2011.

p. 381

E 7-24
 
Petty cash
 
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Loucks Company established a $200 petty cash fund on October 2, 2011. The fund is replenished at the end of each month. At the end of October 2011, the fund contained $37 in cash and the following receipts:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/381_1.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (K)</a>

Required:

Prepare the necessary general journal entries to establish the petty cash fund on October 2 and to replenish the fund on October 31.

E 7-25
 
Petty cash
 
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> Appendix 7A

The petty cash fund of Ricco's Automotive contained the following items at the end of September 2011:

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   The petty cash fund was established at the beginning of September with a transfer of $150 from cash to the petty cash account.

Required:

Prepare the journal entry to replenish the fund at the end of September.

E 7-26
 
Bank reconciliation
 
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> Appendix 7A

Jansen Company's general ledger showed a checking account balance of $23,820 at the end of May 2011. The May 31 cash receipts of $2,340, included in the general ledger balance, were placed in the night depository at the bank on May 31 and were processed by the bank on June 1. The bank statement dated May 31, 2011, showed bank service charges of $38. All checks written by the company had been processed by the bank by May 31 and were listed on the bank statement except for checks totaling $1,890.

Required:

Prepare a bank reconciliation as of May 31, 2011. [Hint: You will need to compute the balance that would appear on the bank statement.]

E 7-27
 
Bank reconciliation and adjusting entries
 
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> Appendix 7A

Harrison Company maintains a checking account at the First National City Bank. The bank provides a bank statement along with canceled checks on the last day of each month. The July 2011 bank statement included the following information:

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   The company's general ledger account had a balance of $38,918 at the end of July. Deposits outstanding totaled $6,300 and all checks written by the company were processed by the bank except for those totaling $8,420. In addition, a $2,000 July deposit from a credit customer was recorded as a $200 debit to cash and credit to accounts receivable, and a check correctly recorded by the company as a $30 disbursement was incorrectly processed by the bank as a $300 disbursement.

Required:

1.

 

Prepare a bank reconciliation for the month of July.

2.

 

Prepare the necessary journal entries at the end of July to adjust the general ledger cash account.

E 7-28
 
Impairment of securities available-for-sale; troubled debt restructuring
 
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> Appendix 7B

At January 1, 2011, Clayton Hoists Inc. owed Third BancCorp $12 million, under a 10% note due December 31, 2012. Interest was paid last on December 31, 2009. Clayton was experiencing severe financial difficulties and asked Third BancCorp to modify the terms of the debt agreement. After negotiation Third BancCorp agreed to:

 

Forgive the interest accrued for the year just ended.

 

Reduce the remaining two years' interest payments to $1 million each.

 

Reduce the principal amount to $11 million.

p. 382

Required:

Prepare the journal entries by Third BancCorp necessitated by the restructuring of the debt at

1.

 

January 1, 2011.

2.

 

December 31, 2011.

3.

 

December 31, 2012.

E 7-29
 
Impairment of securities available-for-sale; troubled debt restructuring
 
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> Appendix 7B

At January 1, 2011, NCI Industries, Inc. was indebted to First Federal Bank under a $240,000, 10% unsecured note. The note was signed January 1, 2009, and was due December 31, 2012. Annual interest was last paid on December 31, 2009. NCI was experiencing severe financial difficulties and negotiated a restructuring of the terms of the debt agreement. First Federal agreed to reduce last year's interest and the remaining two years' interest payments to $11,555 each and delay all payments until December 31, 2012, the maturity date.

Required:

Prepare the journal entries by First Federal Bank necessitated by the restructuring of the debt at

1.

 

January 1, 2011.

2.

 

December 31, 2011.

3.

 

December 31, 2012.

E 7-30
 
FASB codification research
 
<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=jpg::::/sites/dl/premium/0077328787/student/818573/wh_b.jpg','popWin', 'width=NaN,height=NaN,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif"> (0.0K)</a> LO1

The FASB Accounting Standards Codification represents the single source of authoritative U.S. generally accepted accounting principles.

Required:

1.

 

Obtain the relevant authoritative literature on accounting for accounts receivable using the FASB's Codification Research System at the FASB website (www.fasb.org). What is the specific citation that describes disclosure of accounting policies for credit losses and doubtful accounts?

2.

 

List the disclosure requirements.

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E 7-31
 
FASB codification research
 
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Access the FASB's Codification Research System at the FASB website (www.fasb.org).

Required:

Determine the specific citation for accounting for each of the following items:

1.

 

Accounts receivables from related parties should be shown separately from trade receivables.

2.

 

The definition of cash equivalents.

3.

 

Notes exchanged for cash are valued at the cash proceeds.

4.

 

The two conditions that must be met to accrue a loss on an accounts receivable.

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