Compensating Balances A note to the financial statements of Special Company indicates that $75,000 of the balance reported as Cash and Cash Equivalents in the December 31, 2001, balance sheet must remain on deposit in accordance with an agreement with the bank. Special Company has a considerable amount of borrowings from the bank and has agreed to keep a minimum of that amount on deposit at all times.

a. Special Company apparently has cash that it is unable to use. Why would Special enter into an agreement of this type?

b. How should the $75,000 be reported in Special’s balance sheet?

c. One of the employees has suggested that the $75,000 should be deducted from the amount borrowed and the net liability reported as notes payable. Would such a treatment be appropriate? Explain.