Roy Akins was the accounting manager at Zelco, a tire manufacturer, and he played golf with Hugh Stallings, the CEO, who was something of a celebrity in the community. The CEO stood to earn a substantial bonus if Zelco increased net income by year-end. Roy was eager to get into Hugh’s elite social circle; he boasted to Hugh that he knew some accounting tricks that could increase company income by simply revising a few journal entries for rental payments on storage units. At the end of the year, Roy changed the debits from “rent expense” to “prepaid rent” on several entries. Later, Hugh got his bonus, and the deviations were never discovered.RequirementsHow did the change in the journal entries affect the net income of the company at year-end?How did the change in the journal entries affect the net income of the company at year-end?

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Asked Dec 14, 2019
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Roy Akins was the accounting manager at Zelco, a tire manufacturer, and he played golf with Hugh Stallings, the CEO, who was something of a celebrity in the community. The CEO stood to earn a substantial bonus if Zelco increased net income by year-end. Roy was eager to get into Hugh’s elite social circle; he boasted to Hugh that he knew some accounting tricks that could increase company income by simply revising a few journal entries for rental payments on storage units. At the end of the year, Roy changed the debits from “rent expense” to “prepaid rent” on several entries. Later, Hugh got his bonus, and the deviations were never discovered.

Requirements

  1. How did the change in the journal entries affect the net income of the company at year-end?
  2. How did the change in the journal entries affect the net income of the company at year-end?
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Expert Answer

Step 1

First of all, we need to understand that the procudure followed by Roy and Hugh to change the accounts of the company by altering the journal using accounting tricks are not ethical. Let us now understand what journal entries were done & how they affected the net income. 

Step 2

Zelco, had couple of storage units which were occupied by them on rental basis. This means the company was paying rent for using those storage units. Rental payments are a kind of expense for the company & must be charged to income statement as an expense by debiting the rental expense account & crediting the payment made by cash or accruing them to accrued expense account if they are due to be paid.

However, instead of debiting the rental expenses Roy changed them to prepaid rent account. 

Prepaid rent account is an asset- This account means that we have paid certain rent in advance which was still not due for the period. As a result we cannot charge such rent expense to the current income statement and hence...

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