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Chapter 2: 2-1FC-2 (page 117)

Question: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鈥檚 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 鈥渞ent expense鈥� to 鈥減repaid rent鈥� on several entries. Later, Hugh got his bonus, and the deviations were never discovered.

Requirements 2. Who gained and who lost as a result of these actions?

Short Answer

Expert verified

Answer

The prepaid rent is the amount paid for rent but not yet incurred and the CEO and the accounting manager will gain from this transaction.

Step by step solution

01

Definition of net income

The prepaid rent is defined as the amount paid for the rent expense which will incur in the future.

02

Parties who gained or lost as a result of these actions

In this case, the accounting manager and CEO of the company will gain. The accounting manager will gain as get into the elite circle of Hugh. The CEO will gain as his income is dependent on the net income of the business as net income is increasing, and the bonus of the CEO will also increase.

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Most popular questions from this chapter

Question:Preparing financial statements from the trial balance and calculating the debt ratio

The trial balance as of July 31, 2018, for Sara Simon, Registered Dietician, is presented below:

Account Title Debit Credit

Office Supplies 2,300

Cash 38,000

Accounts Receivable 9,000

Prepaid Insurance 2,400

Equipment 16,000

Accounts Payable 3,000

Unearned Revenue 3,912

Notes Payable 31,000

Common Stock 18,000

Dividends 2,800

Salaries Expense 1,700

Rent Expense 1,100

Utilities Expense 500

Service Revenue 17,888

Total Balance \( 73,800 \) 73,800

Requirements 4. Calculate the debt ratio as of July 31, 2018.

Journalizing transactions, posting journal entries to four-column accounts, and preparing a trial balance

The trial balance of Shawn Merry, CPA, is dated March 31, 2018: During April, the business completed the following transactions:

Cash 17,000

Office Supplies 1,200

Accounts Receivable 10,500

Land 29,000

Furniture 0

Automobile 0

Accounts Payable 3,800

Unearned Revenue 0

Common Stock 46,200

Dividends 0

Rent Expense 1,000

Salaries Expense 2,500

Service Revenue 11,200

Total Balance \( 61,200 61,200

During April, the business completed the following transactions:

Apr. 4 Collected \)6,000 cash from a client on account.

8 Performed tax services for a client on account, \(5,500.

13 Paid \)3,300 on account.

14 Purchased furniture on account, \(4,000.

15 Menning contributed his personal automobile to the business in exchange for common stock. The automobile had a market value of \)11,500.

18 Purchased office supplies on account, \(1,600.

19 Received \)2,750 for tax services performed on April 8.

20 Paid cash dividends of \(7,500.

21 Received \)4,900 cash for consulting work completed.

24 Received \(2,500 cash for accounting services to be completed next month.

27 Paid office rent, \)900.

28 Paid employee salary, $1,200.

Requirements 2. Open the four-column ledger accounts listed in the trial balance, together with their balances as of March 31. Use the following account numbers: Cash, 11; Accounts Receivable, 12; Office Supplies, 13; Land, 14; Furniture, 15; Automobile, 16; Accounts Payable, 21; Unearned Revenue, 22; Common Stock, 31; Dividends, 33; Service Revenue, 41; Salaries Expense, 51; and Rent Expense, 52.

Journalizing transactions, posting to T-accounts, and preparing a trial balance

Consider the following transactional data for the first month of operations for Crystal Clear Cleaning.

Nov. 1 Stockholders contributed \(15,000 and a truck, with a market value of \)3,000, to the business in exchange for common stock.

2 The business paid \(4,000 to Pleasant Properties for November through February rent. (Debit Prepaid Rent)

3 Paid \)4,800 for a business insurance policy for the term November 1, 2018 through October 31, 2019. (Debit Prepaid Insurance)

4 Purchased cleaning supplies on account, \(320.

5 Purchased on account an industrial vacuum cleaner costing \)1,500. The invoice is payable November 25.

7 Paid \(3,900 for a computer and printer.

9 Performed cleaning services on account in the amount of \)4,700.

10 Received \(200 for services rendered on November 9. 15 Paid employees, \)400.

16 Received \(15,000 for a 1-year contract beginning November

16 for cleaning services to be provided. Contract begins November 16, 2018, and ends November 15, 2019. (Credit Unearned Revenue)

17 Provided cleaning services and received \)400 cash.

18 Received a utility bill for \(175 with a due date of December 4, 2018. (Use Accounts Payable)

20 Borrowed \)36,000 from bank with interest rate of 6% per year.

21 Received \(500 on account for services performed on November 9.

25 Paid \)750 on account for vacuum cleaner purchased on November 5.

29 Paid \(200 for advertising.

30 Cash dividends of \)1,400 were paid to stockholders

3. Post the journal entries to the T-accounts, and calculate account balances

What is the calculation for the debt ratio? Explain what the debt ratio evaluates.

Before you begin this assignment, review the Tying It All Together feature in the chapter. Part of the Fry鈥檚 Electronics, Inc.鈥檚 experience involves providing technical support to its customers. This includes in-home installations of electronics and also computer support at their retail store locations.

Requirements

2. Assume Fry鈥檚 Electronics, Inc.鈥檚 Modesto, California, location received $24,000 for an annual contract to provide computer support to the local city government. How would Fry鈥檚 Electronics record this transaction? What financial statement(s) would this transaction affect?
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