Bobby purchased a business "Beauty Magazine" from Samuel on 1 December 2018. Thepurchase price of the business was agreed to be 80% of the Company's net profit in each ofthe next five years. Samuel was unhappy when Bobby reported the first year's net profitwhich was far below Samuel's expectations.The purchase agreement did not specify how "net profit" should be measured. It stated onlythat the net profit of the corporation should be measured in a "fair and reasonable manner".Neither Bobby nor Samuel was familiar with accounting concepts.In measuring net profit, Bobby applied the following policies:a) Revenue was recognized when cash was received from customers. Given the natureof business, most customers paid the magazine subscriptions for future delivery ofmagazines before December 2018.b) Expenditures for ink and paper, which were purchased weekly, were charged directlyto Supplies Expense. These purchased were invoiced to Bobby family's weeklygrocery bills.c) The business had purchased a $150,000 printing equipment in January 2019. It wasreported as equipment expense in the first-year financial statement.d) The business also purchased a set of furniture for the reception area at $10,000 duringthe first year of operation. It was purchased under a big sale, featuring "No paymentsuntil 2021". Accordingly, this furniture was not in the accounts since no paymentwas made.REQUIRED:Comment the above profit measurement policies and state if the assets, liabilities and profitsare overstated or understated in each case based on accrual accounting concepts.

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Asked Dec 10, 2019
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Please help me solve this question, thanks! It requires to comment the above profit measurement policies and state if the assets, liabilities and profits are overstated or understated in each case based on accrual accounting concepts. The answer should be more than 500 words.

Bobby purchased a business "Beauty Magazine" from Samuel on 1 December 2018. The
purchase price of the business was agreed to be 80% of the Company's net profit in each of
the next five years. Samuel was unhappy when Bobby reported the first year's net profit
which was far below Samuel's expectations.
The purchase agreement did not specify how "net profit" should be measured. It stated only
that the net profit of the corporation should be measured in a "fair and reasonable manner".
Neither Bobby nor Samuel was familiar with accounting concepts.
In measuring net profit, Bobby applied the following policies:
a) Revenue was recognized when cash was received from customers. Given the nature
of business, most customers paid the magazine subscriptions for future delivery of
magazines before December 2018.
b) Expenditures for ink and paper, which were purchased weekly, were charged directly
to Supplies Expense. These purchased were invoiced to Bobby family's weekly
grocery bills.
c) The business had purchased a $150,000 printing equipment in January 2019. It was
reported as equipment expense in the first-year financial statement.
d) The business also purchased a set of furniture for the reception area at $10,000 during
the first year of operation. It was purchased under a big sale, featuring "No payments
until 2021". Accordingly, this furniture was not in the accounts since no payment
was made.
REQUIRED:
Comment the above profit measurement policies and state if the assets, liabilities and profits
are overstated or understated in each case based on accrual accounting concepts.
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Bobby purchased a business "Beauty Magazine" from Samuel on 1 December 2018. The purchase price of the business was agreed to be 80% of the Company's net profit in each of the next five years. Samuel was unhappy when Bobby reported the first year's net profit which was far below Samuel's expectations. The purchase agreement did not specify how "net profit" should be measured. It stated only that the net profit of the corporation should be measured in a "fair and reasonable manner". Neither Bobby nor Samuel was familiar with accounting concepts. In measuring net profit, Bobby applied the following policies: a) Revenue was recognized when cash was received from customers. Given the nature of business, most customers paid the magazine subscriptions for future delivery of magazines before December 2018. b) Expenditures for ink and paper, which were purchased weekly, were charged directly to Supplies Expense. These purchased were invoiced to Bobby family's weekly grocery bills. c) The business had purchased a $150,000 printing equipment in January 2019. It was reported as equipment expense in the first-year financial statement. d) The business also purchased a set of furniture for the reception area at $10,000 during the first year of operation. It was purchased under a big sale, featuring "No payments until 2021". Accordingly, this furniture was not in the accounts since no payment was made. REQUIRED: Comment the above profit measurement policies and state if the assets, liabilities and profits are overstated or understated in each case based on accrual accounting concepts.

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Overstated Case Comment Understated Revenue was recognized when cash was received from customers. As stated that most of the customers are paid for the future delivery of magazines prior to December 2018. It means unearned revemue is (a) Net income Overstated recorded as revenue earned. In the accrual accounting system, revenue should be recognized when it is earned not when it is received. therefore, it is neither fair nor reasonable to record the unearned revenue as earned revenue. Assets Not effected Understated Liabilities The business Expenses should be separated from personal expenses. Net income Understated Charging weekly expenditures for business supplies directly to expense (b) is reasonable, but considering the Bobby family's grocery bills as Assets Not effected expenses of the business is neither fair nor reasonable. Liabilities Not effected

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