Answered: Exeter is a building contractor on the…

Survey of Accounting (Accounting I)

8th Edition

ISBN:9781305961883

Author:Carl Warren

Publisher:Carl Warren

Chapter5: Internal Control And Cash

Section: Chapter Questions

Problem 5.1C

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Fraud Case 1-1

Exeter is a building contractor on the gulf coast. After losing a number of big lawsuits, it was facing its first annual net loss as the end of the year approached. The owner Hank Snow was under intense pressure from the company creditors to report positive net income for the yar. However, he knew the controller, Alice Li, had arranged a short-term bank loan of $10,000 to cover a temporary shortfall of cash. He told Li to record the incoming cash as “construction revenue” instead of a loan. This would nudge the company’s income into positive territory for the year, and the, he said, the entry could be corrected in January when the loan was repaid.

How would this action affect the year-end income statement? How would it affect the year-end balance sheet?
if you were one of the company’s creditors, how would this fraudulent action affect you?

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