Issue 4: Wanda's Walnuts Receivable Wanda's Walnuts Company (Wanda's Walnuts) owes ACE $82,000 for a computer system installation that was purchased in March of 2018. Wanda's Walnuts has run into financial difficulties due to dramatic decreases in the selling price of walnuts during recent years. In August of 2018 Linda Wilson (ACE president) and Jan Wiggs (ACE controller) established a repayment schedule in which Wanda's Walnuts would repay $10,000 per month (plus interest). While the first payment was made in September (bringing the debt down from $92,000 to $82,000), no further payments have been received. (Wanda's Walnuts has continued to make small purchases from ACE on a "cash" basis.) Your discussion with management indicates that Wanda's Walnuts received a "going concern" modification from its auditors for the year ended 8/30/18 (the audit report was dated 10/22/18). The going concern modification arose due to a question concerning whether Wanda's Walnuts can obtain new financing when needed, on June 30, 2019. However, the situation is not entirely bleak for Wanda's Walnuts future as layoffs of 1/3 of the company's employees resulted in a situation in which Wanda's Walnuts operated at break even for the year ended 8/30/18. Wanda's Walnuts has discussed filing for bankruptcy with bankruptcy legal counsel and at this point believes it is unnecessary. But, if it becomes necessary, counsel suggests that creditors shouldn't expect to receive more than 50 cents on the dollar. Management has suggested to you that 70 cents on the dollar is more likely if bankruptcy ensues. Your analysis at the date of both the Wanda's Walnuts audited annual statements (8/30/18) and the interim statements (11/30/18) indicates that if bankruptcy is declared, a recovery of 50-60 cents on the dollar (with no amount more probable than another in that range) is likely. Yet, it's difficult to know what the situation will be in the future. The sales agreement for the computer system allows ACE to repossess the equipment at any time prior to bankruptcy. But, because the equipment is used and specific to Wanda's Walnuts applications, management believes that the equipment could be sold for a (net) of between $20,000 and $30,000. Also, management points out that such an action would not be considered positively by either Wanda's Walnuts or a number of other companies that ACE is attempting to attract as clients. Accordingly, ACE has resisted this option and does not intend to pursue it at this time. Your analysis of the interim statements (unaudited) reveals that Wanda's Walnuts operated at a slight profit during the first quarter and that walnut prices have increased approximately 15 percent. However, experts disagree widely as to future walnut prices as there is some concern that a significant increase in walnuts from India may enter the US market. Finally, Wanda's Walnuts management, although noncommittal on details, suggests that it believes that it will be able to continue repayments on the debt within the next few months." But your feeling is that it is probable that Wanda's Walnuts will be forced to file for bankruptcy. No allowance for this account is currently included in the allowance for doubtful accounts. Prepare a memo that summarizes relevant professional standards (standard and paragraph should be cited) related to each of the 6 issues and prepare any proposed journal entries. Discuss information that would be included in any note disclosures related to each of the six items (you need not draft formal note disclosures). Prepare entries for all misstatements you identify, regardless of the amount involved. That is, don't simply say no entry is needed because any amount involved would be immaterial. Assume that the current income is $2.997,216. For purposes of preparing journal entries, you may ignore income tax implications as any changes in taxes will be reflected later in the audit process after any entries have been posted to the working trial balance. Issue 4: Wanda's Walnuts Receivable Wanda's Walnuts Company (Wanda's Walnuts) owes ACE $82,000 for a computer system installation that was purchased in March of 2018. Wanda's Walnuts has run into financial difficulties due to dramatic decreases in the selling price of walnuts during recent years. In August of 2018 Linda Wilson (ACE president) and Jan Wiggs (ACE controller) established a repayment schedule in which Wanda's Walnuts would repay $10,000 per month (plus interest). While the first payment was made in September (bringing the debt down from $92,000 to $82,000), no further payments have been received. (Wanda's Walnuts has continued to make small purchases from ACE on a "cash" basis.) Your discussion with management indicates that Wanda's Walnuts received a "going concern" modification from its auditors for the year ended 8/30/18 (the audit report was dated 10/22/18). The going concern modification arose due to a question concerning whether Wanda's Walnuts can obtain new financing when needed, on June 30, 2019. However, the situation is not entirely bleak for Wanda's Walnuts future as layoffs of 1/3 of the company's employees resulted in a situation in which Wanda's Walnuts operated at break even for the year ended 8/30/18. Wanda's Walnuts has discussed filing for bankruptcy with bankruptcy legal counsel and at this point believes it is unnecessary. But, if it becomes necessary, counsel suggests that creditors shouldn't expect to receive more than 50 cents on the dollar. Management has suggested to you that 70 cents on the dollar is more likely if bankruptcy ensues. Your analysis at the date of both the Wanda's Walnuts audited annual statements (8/30/18) and the interim statements (11/30/18) indicates that if bankruptcy is declared, a recovery of 50-60 cents on the dollar (with no amount more probable than another in that range) is likely. Yet, it's difficult to know what the situation will be in the future. The sales agreement for the computer system allows ACE to repossess the equipment at any time prior to bankruptcy. But, because the equipment is used and specific to Wanda's Walnuts applications, management believes that the equipment could be sold for a (net) of between $20,000 and $30,000. Also, management points out that such an action would not be considered positively by either Wanda's Walnuts or a number of other companies that ACE is attempting to attract as clients. Accordingly, ACE has resisted this option and does not intend to pursue it at this time. Your analysis of the interim statements (unaudited) reveals that Wanda's Walnuts operated at a slight profit during the first quarter and that walnut prices have increased approximately 15 percent. However, experts disagree widely as to future walnut prices as there is some concern that a significant increase in walnuts from India may enter the US market. Finally, Wanda's Walnuts management, although noncommittal on details, suggests that it believes that it will be able to continue repayments on the debt within the next few months." But your feeling is that it is probable that Wanda's Walnuts will be forced to file for bankruptcy. No allowance for this account is currently included in the allowance for doubtful accounts. Prepare a memo that summarizes relevant professional standards (standard and paragraph should be cited) related to each of the 6 issues and prepare any proposed journal entries. Discuss information that would be included in any note disclosures related to each of the six items (you need not draft formal note disclosures). Prepare entries for all misstatements you identify, regardless of the amount involved. That is, don't simply say no entry is needed because any amount involved would be immaterial. Assume that the current income is $2.997,216. For purposes of preparing journal entries, you may ignore income tax implications as any changes in taxes will be reflected later in the audit process after any entries have been posted to the working trial balance