Sams Recycling (SR) sells recycles plastic to manufacturing companies. SR was founded in 1998 by Sam Adams. Sam has maintained full ownership of SR, deciding not to take it public when so many other recycling companies were going public. While Sam is the only shareholder, SR does have a substantial bank loan and the bank requires an annual audit of SRs financial statements. The bank requires SR to maintain a debt-to-equity ratio of less than 0.7:1. SR follows ASPE.

It is now early 2021 and you are the controller for SR, 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 SR facility to oversee production and day-to-day operations, Sam hired a chief operating officer, John Frank. Johns background is sales and operations, and he has limited knowledge of accounting. John tried to run the accounting side of SR when he was hired but determined that it wasnt his area of strength. He received Sams 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 with him. Use Excel for exhibits. Journal entries can be included in the Word document.

Exhibit I

Sams Recycling Information

SRs policy is 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 $56,000, a residual value of $3,000, and a useful life of eight years. The truck is being depreciated on a straight-line basis. John would like you to calculate and prepare the journal entry to record the depreciation on the truck for the December 31, 2020, year end.

John 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.

John came to you and wanted to know why the land across the street that was purchased in 2020 for $770,000 could not be recorded at the estimated fair value of $820,000. 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 $820,000 for it, but Sam doesnt want to sell it. I think we should record it at what we could get for it. What do you think?

During 2020, John worked hard to attract new business. In November, he managed to sign a contract with Scholar Toys (ST) that would see SR selling 500,000 kg of recycled plastic to ST over the next two years at a price of $3 per kilogram. John 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, SR had produced and delivered 50,000 kg of recycled plastic to ST. You noted to John that it appears that the $200,000 deposit was recorded as revenue.

On September 1, 2020, SR secured a contract with Ontario Manufacture Inc. (OM) for $50,000 of specialized plastic. To facilitate the sale, SR agreed to store the specialized plastic until they were needed by OM in their warehouse. OM paid a $20,000 deposit September 1, 2020. OM agreed to be billed monthly for the product that was delivered to them from SR. SR completed manufacturing the order on December 15, 2020, and the OM product is being stored in the Toronto warehouse. By December 31, 2020, 15% of OMs SP product had been delivered. SR recorded $20,000 of revenue relating to this contract in fiscal 2020.

SR sells to many customers on credit. SR employs a credit manager who reviews a clients financial history prior to allowing them to buy on credit. It is SRs policy to use the allowance for doubtful accounts method based upon the aging of receivables. The balance is adjusted yearly after taking into account any adjustments for customers accounts written off.

A snapshot of SRs current accounts receivable balance at year end shows that it has a balance of $529,200 with an allowance for doubtful accounts debit balance of $7,000. (Note that this is prior to any adjusting journal entries that you would make.) A more detailed breakdown of the accounts receivable balance shows the following amounts aged:

0 30 days:	$280,000
31-60 days:	$155,000
61-90 days:	$75,600
Over 90 days	$18,600

You note that included in the above aged balances is an amount of $27,000 from a customer, Cutty Kitchens. This customer went bankrupt in November 2020, and there is no possibility of receiving payment from it.

It is standard SR policy that 2% of receivables from 0 to 30 days will ultimately be uncollectible, 4% for 3160 days, 20% for 6190 days, and 80% greater than 90 days will be uncollectible. This policy is implemented after adjusting for any amounts at year end that will definitely not be collected.

For the year ended December 31, 2020, prior to any adjustments, Sams Recyclings financial statements had revenue of $3.3 million, net income of $450,000, equity of $5.6 million and liabilities of $3.85 million. If SR is in violation of the bank debt to equity covenant, how should SR deal with the issue with the bank?