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Chapter 1: Q1FC_1 (page 54)

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鈥檚 creditors to report positive net income for the year. However, he knew that 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 鈥渃onstruction revenue鈥� instead of a loan. That would nudge the company鈥檚 income into positive territory for the year, and then, he said, the entry could be corrected in January when the loan was repaid. Requirements 1. How would this action affect the year-end income statement? How would it affect the year-end balance sheet? 2. If you were one of the company鈥檚 creditors, how would this fraudulent action affect you?

Short Answer

Expert verified

The action will overstate net income and stockholders鈥� equity, and will understate total liabilities.

Step by step solution

01

Step-by-Step SolutionStep 1: Effect on Income Statement

As the loan amount is reported as construction revenue, it will increase the overall profit of the company, hence it will result in overstatement of net income at the end of the year.

02

Effect on Balance Sheet

As net income is increased by this action, it will overstate the stockholders鈥� equity also. Also, as the proceeds should be recorded as liability, which is not recorded in this case, it will understate the liabilities in the balance sheet.

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Most popular questions from this chapter

Annette Pachelo recently opened her own law office on March 1, which she operates as a corporation. The name of the new entity is Annette Pachelo, Attorney. Pachelo experienced the following events during the organizing phase of the new business and its first month of operation, March 2018. Some of the events were personal and did not affect the law practice. Others were business transactions and should be accounted for by the business. Mar. 1 Sold personal investment in Amazon stock, which she had owned for several years, receiving \(35,000 cash. 2 Deposited the \)35,000 cash from the sale of the Amazon stock in her personal bank account. 3 Deposited \(73,000 cash in a new business bank account titled Annette Pachelo, Attorney. The business issued common stock to Pachelo. 5 Paid \)700 cash for ink cartridges for the printer. 7 Purchased computer for the law office, agreeing to pay the account, \(5,000, within three months. 9 Received \)2,800 cash from customers for services rendered. 15 Received bill from The Lawyer for magazine subscription, \(400. (Use Miscellaneous Expense account.) 23 Finished court hearings on behalf of a client and submitted a bill for legal services, \)10,000, on account. 28 Paid bill from The Lawyer. 30 Paid utilities, \(1,200. 31 Received \)3,300 cash from clients billed on March 23. 31 Cash dividends of $5,500 were paid to stockholders. Requirements 1. Analyze the effects of the preceding events on the accounting equation of Annette Pachelo, Attorney. Use a format similar to Exhibit 1-6.

Identifying users of accounting information For each user of accounting information, identify if the user would use financial accounting or managerial accounting. a. investor e. controller b. banker f. stockholder c. IRS g. human resources director d. manager of the business h. creditor

Presented here are the accounts of Pembroke Bookkeeping Company for the year ended December 31, 2018: Land \( 10,000 Common Stock \) 29,000 Notes Payable 31,000 Accounts Payable 7,000 Property Tax Expense 3,100 Accounts Receivable 1,200 Dividends 28,000 Advertising Expense 12,000 Rent Expense 7,000 Building 147,400 Salaries Expense 64,000 Cash 2,800 Salaries Payable 800 Equipment 15,000 Service Revenue 192,000 Insurance Expense 1,700 Office Supplies 12,000 Interest Expense 6,600 Retained Earnings, Dec. 31, 2017 51,000 Requirements 1. Prepare Pembroke Bookkeeping Company鈥檚 income statement. 2. Prepare the statement of retained earnings. 3. Prepare the balance sheet.

Using the following information, calculate the return on assets. Net income for November, 2018 $ 5,000 Total assets, November 1, 2018 76,000 Total assets, November 30, 2018 80,250

Identifying accounts on the financial statements Consider the following accounts: a. Accounts Payable b. Cash c. Common Stock d. Accounts Receivable e. Rent Expense f. Service Revenue g. Office Supplies h. Dividends i. Land j. Salaries Expense Identify the financial statement (or statements) that each account would appear on. Use I for Income Statement, RE for Statement of Retained Earnings, B for Balance Sheet, and C for Statement of Cash Flows.
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