1.
Ethical Case Study
Case Summary:
The manufacturing company C rented out their excess warehouse space to a local company in lease. The entire lease amount was received on the day, the lease was signed. So the company reports a huge amount of unearned rent in its balance sheet. While preparing the adjusted
To explain: If Mr. C is behaving ethically or not?
2.
The parties affected by C’s decision
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Chapter 3 Solutions
Accounting
- Your client is preparing financial statements to show the bank. You know that he has incurred a refrigeration repair expense during the month, but you see no such expense on the books. When you question the client, he tells you that he has not yet paid the 1,255 bill. Your client is on the accrual basis of accounting. He does not want the refrigeration repair expense on the books as of the end of the month because he wants his profits to look good for the bank. Is your client behaving ethically by suggesting that the refrigeration repair expense not be booked until the 1,255 is paid? Are you behaving ethically if you agree to the clients request? What principle is involved here?arrow_forwardA new client, the Wolf Company, asks your advice concerning the point in time that the company should recognize revenue from the rental of its office buildings under generally accepted accounting principles. Renters usually pay rent on a quarterly basis at the beginning of the quarter. The owners contend that the critical event that motivates revenue recognition should be the date the cash is received from renters. After all, the money is in hand and is very seldom returned.Required:Do you agree or disagree with the position of the owners of Wolf Company? State whether you agree or disagree, and support your answer by relating it to accrual accounting under GAAP.arrow_forwardForman's Services is a small accounting firm that offers payroll and bookkeeping services to small businesses and individuals. A local merchant has approached Will Forman, the owner, about taking over his payroll disbursements, but is concerned about the fees Forman's normally charges. The costs and revenues at Forman's Services follow. Sales revenue Costs FORMAN'S SERVICES Annual Income Statement Labor Equipment lease Rent Supplies Owner's salary Other costs Total costs Operating profit (loss) If Forman's gets the merchant's business. It will incur an additional $31,000 in labor costs. Will also estimates that he will have to Increase equipment leases by about 10 percent, supplies by 15 percent, and other costs by 5 percent. There will be no additional rent. Required: a. What are the differential costs that would be incurred as a result of adding this new client? b. Will would normally charge about $51,000 in fees for the services the store would require. How much could he offer to…arrow_forward
- The auditor worked for this client for years. But before accepting or continuing with the client what factors should the auditor consider looking at the given information below? The client: Although client cash flows have been stable, the disruption caused by the 2020 global pandemic made it difficult for retail lessors to pay their rent on time. Due to the company's tenant-friendly approach, retail clients were allowed to renegotiate their lease and temporarily pause rent payments between June 2020 and July 2021, shifting those payments to the last 12 months. Most of these leases will expire in the next two years, including all retail companies unable to pay their rent. However, they estimate that they will receive all the lost cash flow from these tenants within a couple of years. Currently, the company is a privately held REIT that hopes to go public in the next six months. It follows Generally Accepted Accounting Principles (GAAP) and has a strong internal audit department. As a…arrow_forwardE. Gevera Realty Co. who owns a building in the downtown area in Davao City was partly rented by Metro Drug Company sometime last year. Based on their lease contract agreement, the rental will be paid every second day after the end of every month and it was being done on a consistent basis. The fiscal year will end on June 30 and payment of the rental will be made beyond this date. How will both accountants of E. Gevera Realty Company and Metro Drug Company take this up in the record as an adjustment in their respective books of accounts?arrow_forwardTom’s Tax Services is a small accounting firm that offers tax services to small businesses and individuals. A local store owner has approached Tom about doing his taxes but is concerned about the fees Tom normally charges. The costs and revenues at Tom’s Tax Services follow: Tom’s Tax Services Annual Income Statement Sales Revenue 724,000 Costs Labor 457,000 Equipment Lease 48,000 Rent 42,500 Supplies 31,300 Tom’s Salary 73,800 Other Costs 21,400 Total Costs 674,900 Operating Profit (Loss) 49,100 If Tom gets the store’s business, he will incur an additional $59,200 in labor costs. Tom also estimates that he will have to increase equipment leases by about 5 percent, supplies by 5 percent, and other costs by 15 percent. Required: What are the differential costs that would be incurred as…arrow_forward
- Willingham Construction is in the business of building high-priced, custom, single-family homes. The company,headquartered in Anaheim, California, operates throughout the Southern California area. The construction periodfor the average home built by Willingham is six months, although some homes have taken as long as nine months.You have just been hired by Willingham as the assistant controller and one of your first tasks is to evaluate thecompany’s revenue recognition policy. The company presently recognizes revenue upon completion for all of itsprojects and management is now considering whether revenue recognition over time is appropriate.Required:Write a 1- to 2-page memo to Virginia Reynolds, company controller, describing the differences between theeffects of recognizing revenue over time and upon project completion on the income statement and balance sheet.Indicate any criteria specifying when revenue should be recognized. Be sure to include references to GAAP asthey pertain to…arrow_forwardAccording to your studying of the Conceptual Framework, Discuss the following: 1. Selane Eatery operates a catering service specializing in business luncheons for large companies. Selane requires customers to place their orders 2 weeks in advance of the scheduled events. Selane bills its customers on the tenth day of the month following the date of service and requires that payment be made within 30 days of the billing date. Conceptually, when should Selane recognize revenue related to its catering service? 2. Mogilny Company paid $135,000 for a machine. The Accumulated Depreciation account has a balance of $46,500 at the present time. The company could sell the machine today for $150,000. The company president believes that the company has a “right to this gain.” What does the president mean by this statement? Do you agree? 3. Three expense recognition methods (associating cause and effect, systematic and rational allocation, and immediate recognition) were discussed in the chapter…arrow_forwardMary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates’ payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions: payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system. Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting: a. The current payroll software that was purchased for $4,000 three years ago would not be needed if payroll processing were outsourced. b. Duck Associates’ bookkeeper would spend half her time preparing the weekly payroll input form that is…arrow_forward
- Faraday Electronic Service repairs stereos and DVD players. During the year, Faraday engaged in the following activities: On September 1, Faraday paid Wausau Insurance $4,860 for its liability insurance for the next 12 months. The full amount of the prepayment was debited to prepaid insurance. At December 31, Faraday estimates that $1,520 of utility costs are unrecorded and unpaid. Faraday rents its testing equipment from JVC. Equipment rent in the amount of $1,440 is unpaid and unrecorded at December 31. In late October, Faraday agreed to become the sponsor for the sports segment of the evening news program on a local television station. The station billed Faraday $4,350 for 3 months' sponsorship—November, December, and January—in advance. When these payments were made, Faraday debited prepaid advertising. At December 31, 2 months’ advertising has been used and 1 month remains unused. 1. Prepare adjusting entries at December 31 for these four activities. If an amount box…arrow_forwardJessica Boland works for Sea Biscuit Co. She and Farah Smith, her manager, are preparing adjusting entries for annual financial statements. Boland computes depreciation and records it as Depreciation Expense—Equipment 123,000 Accumulated Depreciation—Equipment 123,000 Smith agrees with her computation but says the credit entry should be directly to the Equipment account. Smith argues that while accumulated depreciation is technically correct, “it is less hassle not to use a contra account and just credit the Equipment account directly. And besides, the balance sheet shows the same amount for total assets under either method.” Required 1. How should depreciation be recorded? Do you support Boland or Smith? 2. Evaluate the strengths and weaknesses of Smith’s reasons for preferring her method. 3. Indicate whether the situation Boland faces is an ethical problem. Explain.arrow_forwardMary Tan is the controller for Duck Associates, a property management company in Portland, Oregon. Each year, Tan and payroll clerk Toby Stock meet with the external auditors about payroll accounting. This year, the auditors suggest that Tan consider outsourcing Duck Associates' payroll accounting to a company specializing in payroll processing services. This would allow Tan and her staff to focus on their primary responsibility: accounting for the properties under management. At present, payroll requires 1.5 employee positions—payroll clerk Toby Stock and a bookkeeper who spends half her time entering payroll data in the system. Tan considers this suggestion, and she lists the following items relating to outsourcing payroll accounting: The current payroll software that was purchased for $4,000 three years ago would not be needed if payroll processing were outsourced. Duck Associates' bookkeeper would spend half her time preparing the weekly payroll input form that is given to the…arrow_forward
- College Accounting (Book Only): A Career ApproachAccountingISBN:9781337280570Author:Scott, Cathy J.Publisher:South-Western College Pub