ABC System Inc. $($ABC$)$ has operations all across the country and is primarily engaged in the sale of software and manufacture of new and refurbished hardware. ABC is a public company listed on the Toronto Stock Exchange $($TSX$)$ with a December $31$ fiscal year end.

In the beginning of $2024,$ ABC applied for a $$10$ million loan with a local bank to fund further expansion. The bank will need ABC to maintain a minimum EBITDA $($Earnings before interest, taxes, depreciation, and amortization$)$ level and requires ABC to submit the audited financial statement for $2024$ within $3$ months of the company$$s year$-$end.

It is now January $10,2025,$ and you, CPA, the newly hired Controller of ACB Inc., called into the office of Michelle Kwan, the CFO of ABC., Michelle is looking for your help with an accounting issue that was identified upon inspection of the December $31,2024,$ financial statements. The target issuance date of the financial statement is Feb $23,2025.$

You noted that in January $2022,$ ABC entered into a five$-$year fixed price contract for processing chips to protect the company against market fluctuations. During each of the first three years of the contract, this decision appeared to be a good one, as the price of the processing chips continued to go up$.$ At December $10,2024,$ the market price of the processing chips dropped significantly. The executive team believes that the price will remain at this level or drop even more over the next two years. On December $31,2024,$ ABC triggered the cancellation clause that allows ABC to get out of the contract for $$150,000$ and ABC will make the payment in March $2025.$ Because the payment won$$t be made until $2025,$ the accountant didn$$t record any journal entries in the fiscal year of $2024.$

Michelle would like you to review the transaction and determine whether it has been accounted appropriately.

Instructions

Assume the role of ABC$$s Controller and discuss the financial accounting issue you identified in preparation of final financial statements for fiscal year ending December $31,2024($use the case analysis framework covered in the course, refer to the $$Discussion Section$$ for reference if needed$).$