Meltdown Incorporated

Co$-$authored with

Stephanie McGarry

Laurentian University

Meltdown Incorporated $($MI$)$ recycles plastic and then sells it to manufacturing companies to produce toys, household

items $($such as coffee makers$),$ and so on$.$ MI was founded in $1998$ by Samuel Abdesselam. Sam has maintained full

ownership of MI$,$ deciding not to take it public when so many other recycling companies were going public. While

Sam is the only shareholder, MI does have a substantial bank loan and the bank requires an annual audit of MI$$s

financial statements and MI follows ASPE. Sam has a background in operations, but is also very strong in accounting.

It is now early $2021$ and you are the controller for MI$,$ having been hired just days before the December $31,2020,$

year end. In October $2020,$ Sam decided to step away from the business and spend more time at his second home in

Florida. In order to ensure there was someone at the MI facility to oversee production and day$-$to$-$day operations, Sam

hired a chief operating officer, Fred Finklestein. Fred$$s background is sales and operations and he has limited knowledge of accounting. Fred tried to run the accounting side of MI when he was hired, but determined that it wasn$$t his

area of strength. He received Sam$$s permission to hire you to help him with accounting for some of the activities in

preparation for year end, and to help him understand the accounting function better.

Required

Sam has some very specific activities for you and has provided you with the information he requires in Exhibit I.

Prepare a report to Sam that answers his questions and be sure to provide him with all the necessary backup and calculations to support your discussion.

$$ It is MI $$ s policy to prorate depreciation in the year of acquisition

and year of disposal $($based on the month acquired or disposed$).$

Depreciation is only calculated and recorded once per year, at

year end, unless an asset is sold.

$$ On March $1,2020,$ MM purchased a new delivery truck with a

cost of $$54,000,$ a residual value of $$3,000,$ and a useful life of

eight years. The truck is being depreciated on a straight$-$line

basis. Fred would like you to calculate and prepare the journal

entry to record the depreciation on the truck for the December

$31,2020,$ year end.

$$ Fred is also considering selling the truck on March $1,2021.$

He expects to be able to get $$45,000$ cash for it and would

like to know what the accounting implication would be

if this happened. He feels that he would understand it

better if you provided a journal entry with supporting

calculations.

$$ During $2020,$ MI purchased a parcel of land with a building on it

across the street from its current location. The purchase price

was $$450,000$ for the land and the building. MI intends to build a

new production warehouse on the land and demolished the old

building on it$.$ The cost of demolishing the building was $$20,000$

and MI was able to recoup $$8,000$ of these costs by selling the

scrap to a recycler. Fred is unsure of how this should be

accounted for and has asked you to provide the journal entry

with support.

$$ MI also purchased new equipment on November $1,2020.$ The

equipment cost $$125,000.$ In addition, MI had to pay $$5,000$ in

shipping fees to have the equipment delivered and $$8,000$ to

have a cement pad poured for the installation of equipment. Fred

believes there was $$15,000$ of labour downtime as a result of the

installation. The equipment has an expected salvage value of

$$8,000$ and it is standard MI practice to depreciate equipment

using a declining balance rate of $20\%.$ Fred has asked you to set

up the equipment on the books at the total cost of $$153,000$ and

record the depreciation for the year end.

$$ Fred came to you and wanted to know why the land across the

street that was purchased in $2020$ could not be recorded at the

estimated fair value of $$800,000.$Since we purchased that land,

prices have skyrocketed in the area. Just yesterday, I had a call

from a casino developer asking if they could buy it for $$780,000.$

I think we could easily get $$800,000$ for it$,$ but Sam doesn $$ t want

to sell it$.$ I think we should record it at what we could get for it$.$

What do you think?$$

$$ During $2020,$ Fred worked hard to attract new business. In

November, he managed to sign a contract with Simcoe Toys

$($ST$)$ that would see MI selling $500,000$ kg of recycled plastic

to ST over the next two years at a price of $$2$ per kilogram.

Fred is quite excited about the contract and the fact that ST

paid $$200,000$ in advance of the start of production. The

amount was received December $1,2020.$ As of December $31,$

$2020,$ MI had produced and delivered $50,000$ kg of recycled

plastic to ST$.$ You noted to Fred that it appears that the

$$200,000$ deposit was recorded as revenue. Fred has asked you

if there is anything wrong with that entry. If there is$,$ he would

like to know why and for you to make any correcting entry that

you feel is appropriate.

$$ MI sells to many