Question
ABC Limited (ABC) is a private company producing lunch packages. It mainly sells products to supermarkets and grocery stores. ABC has a loan from a
ABC Limited (ABC) is a private company producing lunch packages. It mainly sells products to supermarkets and grocery stores. ABC has a loan from a local bank, which is secured by its accounts receivable and inventory. The loan is not to exceed 70% of accounts receivable and 40% of inventory as at the accounting year end (December 31, 2020). ABC uses perpetual inventory system. ABC must provide the bank with the reviewed financial statements within 60 days of its year end. It is now in early January 2021. You are a CPA from a local accounting firm and will conduct a review of the ABCs financial statements. You received a memo from the ABCs management including the following accounting issues: 1. Super Software Co. (SSC), an ABCs neighbour, is a software development company with high growth in recent years. On August 15, 2020, SSC signed a contract with ABC that SSCs employees can pick up a lunch package every working day for one year beginning on September 1, 2020 for a yearly fee of $120,000, with 50% payable upfront. The fee is non-refundable, non-cancellable, and not dependent on the number of lunch packages picked up. When the contract was signed, ABC credited revenue for $120,000 and debited both cash and accounts receivable for $60,000 each.
Required:
You are asked to provide a report to the ABCs management to analyze these accounting issues.
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