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:

In October 2020, ABC launched a loyalty program. According to the program, consumers can earn one point for buying an ordinary lunch package (excluding frozen lunch packages) and can redeem 20 points for an ordinary lunch package in stores. ABC first uses packages purchased by stores for the redemption and then deducts them from its sales. On December 31, 2020, stores reported that they had sold 50,000 ordinary lunch packages to consumers at $7 per package since the beginning of the loyalty program, and that consumers had redeemed 6,000 points. Ordinary lunch packages are sold to stores at $4.00 per package. The cost of ordinary lunch packages is $1.80 per package.

Required:

You are asked to provide a report to the ABCs management to analyze these accounting issues.