Unit Two Case Analysis

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Critical Thinking

Decision Case 3-1

 

One year ago, Tyler Stasney founded Swift Classified Ads. Stasney remembers that you took an accounting course while in college and comes to you for advice. He wishes to know how much net income his business earned during the past year in order to decide whether to keep the company going. His accounting records consist of the T-accounts from his ledger, which were prepared by an accountant who moved to another city. The ledger at December 31 follows. The accounts have not been adjusted.

Stasney indicates that at year-end, customers owe the business $1,600 for accrued service revenue. These revenues have not been recorded. During the year, Swift Classified Ads collected $4,000 service revenue in advance from customers, but the business earned only $900 of that amount. Rent expense for the year was $2,400, and the business used up $1,700 of the supplies. Swift determines that depreciation on its equipment was $5,000 for the year. At December 31, the business owes an employee $1,200 accrued salary.

Help Swift Classified Ads compute its net income for the year. Advise Stasney whether to continue operating Swift Classified Ads.

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Ethical Issue 3-1

The net income of Steinbach & Sons, a landscaping company, decreased sharply during 2016. Mort Steinbach, owner and manager of the company, anticipates the need for a bank loan in 2017. Late in 2016, Steinbach instructs the company’s accountant to record $2,000 service revenue for landscape services for the Steinbach family, even

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though the services will not be performed until January 2017. Steinbach also tells the accountant not to make the following December 31, 2016, adjusting entries:

Requirements

1. Compute the overall effects of these transactions on the company’s reported net income for 2016.

2. Why is Steinbach taking this action? Is his action ethical? Give your reason, identifying the parties helped and the parties harmed by Steinbach’s action.

3. As a personal friend, what advice would you give the accountant?

Fraud Case 3-1

XM, Ltd. was a small engineering firm that built high-tech robotic devices for electronics manufacturers. One very complex device was partially completed at the end of 2016. Barb McLauren, head engineer, knew the experimental technology was a failure and XM would not be able to complete the $20,000,000 contract next year. However, the company was getting ready to be sold in January. She told the controller that the device was 80% complete at year-end and on track for successful completion the following spring; the controller accrued 80% of the contract revenue at December 31, 2016. McLauren sold the company in January 2017 and retired. By mid-year, it became apparent that XM would not be able to complete the project successfully and the new owner would never recoup his investment.

Requirements

1. For complex, high-tech contracts, how does a company determine the percentage of completion and the amount of revenue to accrue?

2. What action do you think was taken by XM in 2017 with regard to the revenue that had been accrued the previous year?

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Financial Statement Case 3-1

Starbucks Corporation—like all other businesses—makes adjusting entries at year-end in order to measure assets, liabilities, revenues, and expenses properly. Examine Starbucks Corporation’s Balance Sheet and Income Statement. Visit http:// www.pearsonhighered.com/Horngren to view a link to Starbucks Corporation’s Fiscal 2013 Annual Report.

Requirements

1. Which asset accounts might Starbucks record adjusting entries for? 2. Which liability accounts might Starbucks record adjusting entries for? 3. Review Note 1 (Property, Plant, and Equipment) in the Notes to Consolidated

Financial Statements. How are property, plant, and equipment carried on the balance sheet? How is depreciation of these assets calculated? What is the range of useful lives used when depreciating these assets?

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