Mississauga Fit Club (MFC) is a newly established business that offers exercise classes, clothing and accessories. MFC operates out of Mississauga Ontario and is owned by Carol Osbourne, a former exercise teacher for a large gym franchise. She decided to start her own exercise centre in order to provide a larger variety of customized exercise classes to small groups, including beginner, intermediate and advanced classes. MFC also has a small storefront that is used to sell exercise clothing along with other accessories, such as headbands, water bottles, and exercise mats.

In order to help finance operations MFC obtained a working capital loan from a small business department of a local credit union. The loan is a revolving line of credit that is secured by the company's inventory and accounts receivable. The loan is not to exceed a maximum of 50% of inventory and 75% of accounts receivable as at the company's year end (31 March 2020). MFC must present reviewed financial statements prepared in accordance with ASPE to the credit union within 60 days of its year end,

It is now February 2020 and Carol is starting to get nervous about the preparation of the financial statements. Carol has minimal exposure to accounting duties: therefore, she hired a local book keeper to help her select an appropriate fiscal year end, set up the accounting software package, and design processes and documents to be used in day to day functions.

Carol has contacted L&L LLP in regards to conducting a review of MFC's financial statements. You are the senior accountant in charge of the review and recently sat down with Carol to discuss the engagement.

Carol feels confident that all her routine transactions have been posted correctly but is unsure of some of the more complicated issues that arose during the year. Carol discusses with you the following unresolved issues:

1. MFC was able to obtain a large corporate client, Y&T Barristers and Solicitors LLP. On 1 July 2019 MFC and the law firm agreed that the employees of the law firm would have unlimited access to the exercise classes for a yearly fee of $50 000, with 50% payable upfront. The fee is non refundable, non cancellable, and not dependent on the number of classes actually participated in by the law firm employees. Carol credited revenue for $50 000 when the contract was signed, and debited both cash and accounts receivable for $25 000 each. The large contract helped with cash flows, and is a major reason why MFC has a current cash balance of $10 000.
2. Midway though the year MFC began selling energy bars and drinks in its storefront. MFC reached an exclusive agreement to be the sole distributor of EXCEL Energy Plus bars in Mississauga. MFC was required to purchase 5 000 bars at the onset of the contract at a cost of $2.50 per bar. On 15 March an ingredient included in the bars was allegedly linked to various illnesses. Currently the Canadian Department of Health is investigating the claims and the outcome is uncertain. No official comments have been made. MFC sold 1 340 bars during the year.
3. The aged accounts receivable balance is as follows:

Account	Balance	Current	30-60 days	61-90 days	Over 90 days
1.H&R LLP	$25000				$25000
2. Y Seguin	$200		$200
3.J. Collie	$45	$45
4.Nurses Assoc	$4125	$4125
5.R. Smith	$75			$75
6. W. Jones	$150				$150
7. Fresh Grocery	$850		$850
8. Timber Forest	$1650			$1650
9. BioMed	$950		$950
10. Precious Metals	$1275			$1275
	$34320	$4170	$2000	$3000	$25150

MFC reached an agreement with a local nurses' association to provide 55 pairs of exercise pants and shirts for an upcoming walk-a-thon in May 2019. The shirts and pants were customized with embroidery of each nurse's name. MFC charged the nurses' association with a specialpromotion price of $75 per combo and delivered the goods in mid-March. In late March the nurses' association contacted MFC stating that the goods received are not the same as the goods ordered. The nurses; association has asked for a 40% discount on the goods, or else it plans to return the goods and cancel the order.

Receivables accounts 7 to 10 are the result of a promotion held by MFC in order to attract more corporate clients. Based on her experience with a larger gym franchise Carol states that 10% of receivables past 60 days are typically uncollectible. However, she is very confident that the receivable from H&R LLP will be fully collected.

Even though a violation of the covenant can result in the credit facility becoming cancelled with the outstanding balance due immediately. Carol states that she is not too concerned because her accounts receivable and inventory are $34 320 and $96 550 respectively, while her loan is only $65000. However she would like you to prepare a report to go along with the review engagement that discusses the appropriate accounting treatment of the above noted accounting issues.

It is now 30 March 2020. make the report for Carol, and provide any other recommendations relevant to the bank loan.