Issue 4: Alan Almond Receivable

Alan Almond Company (Alan Almond) owes BCE $82,000 for a computer system installation purchased in March 2022. Alan Almond has faced financial difficulties due to a dramatic decrease in the selling price of almonds in recent years. In August 2022, Linda Wilson (BCE president) and Jan Wiggs (BCE controller) established a repayment schedule where Alan Almond would repay $10,000 per month (plus interest). Although the first payment was made in September (reducing the debt from $92,000 to $82,000), no further payments have been received. Alan Almond has continued to make small purchases from BCE on a "cash" basis.

Management discussions indicate that Alan Almond received a "going concern" modification from its auditors for the year ending 8/31/2022 (audit report dated 10/22/2022). The modification arose due to uncertainty about whether Alan Almond can secure new financing when needed, as of June 30, 2023. Despite this, there is some optimism as layoffs of 1/3 of the company's employees resulted in a break-even operation for the year ending 8/31/2022. Alan Almond has considered filing for bankruptcy but currently believes it is unnecessary. However, counsel suggests creditors should not expect more than 50 cents on the dollar in bankruptcy, while management suggests 70 cents on the dollar is more likely.

Your analysis of both the Alan Almond audited annual statements (8/30/2022) and the interim statements (11/30/2022) indicates a likely recovery of 50-60 cents on the dollar in bankruptcy, with no amount more probable than another in that range. The future situation remains uncertain. The sales agreement for the computer system allows BCE to repossess the equipment before bankruptcy. However, because the equipment is used and specific to Alan Almond’s applications, management believes it could be sold for a net of $20,000 to $30,000. Repossession could negatively impact BCE's reputation with potential clients, so this option is not being pursued.

The interim statements (unaudited) reveal that Alan Almond operated at a slight profit during the first quarter, and almond prices have increased by approximately 15 percent. Experts have widely differing opinions on future almond prices due to concerns about increased almond imports from India entering the US market. Alan Almond’s management, although vague on details, believes it will resume debt repayments within the "next few months." However, you believe it is probable that Alan Almond will be forced to file for bankruptcy.

No allowance for this account is currently included in the allowance for doubtful accounts. What, if any, loss reserve (and/or note disclosure) should be reflected in the financial statements?