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Print by: 11240.201530: ACCT201.001_SPRING 2015 / Homework 1

* Question 6

Merando Corporation was formed on January 1, 2014. At December 31, 2014, Bill Jensen, the president and sole stockholder, decided to prepare a balance sheet, which appeared as follows.

MERANDO CORPORATION Balance Sheet December 31, 2014
Assets	Liabilities and Stockholders’ Equity
Cash	$26,814	Accounts payable	$40,221
Accounts receivable	67,035	Notes payable	20,111
Inventory	48,265	Boat loan	29,495
Boat	32,177	Stockholders’ equity	85,805

Bill willingly admits that he is not an accountant by training. He is concerned that his balance sheet might not be correct. He has provided you with the following additional information.

1.		The boat actually belongs to Jensen, not to Merando Corporation. However, because he thinks he might take customers out on the boat occasionally, he decided to list it as an asset of the company. To be consistent, he also listed as a liability of the corporation his personal loan that he took out at the bank to buy the boat.
2.		The inventory was originally purchased for $33,518, but due to a surge in demand Bill now thinks he could sell it for $48,265. He thought it would be best to record it at $48,265.
3.		Included in the accounts receivable balance is $13,407 that Bill loaned to his brother 5 years ago. Bill included this in the receivables of Merando Corporation so he wouldn’t forget that his brother owes him money.

(b) Provide a corrected balance sheet for Merando Corporation. (Hint: To get the balance sheet to balance, adjust stockholders’ equity.) (List assets in order of liquidity.)

MERANDO CORPORATION Balance Sheet December 31, 2014
Assets
		$


		$
Liabilities and Stockholders' Equity

	$

		$

		$

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Print by: Charles Barrah 11240.201530: ACCT201.001_SPRING 2015 / Homework 1

Question 7

Some people are tempted to make their finances look worse to get financial aid. Companies sometimes also manage their financial numbers in order to accomplish certain goals. Earnings management is the planned timing of revenues, expenses, gains, and losses to smooth out bumps in net income. In managing earnings, companies’ actions vary from being within the range of ethical activity, to being both unethical and illegal attempts to mislead investors and creditors. Provide responses for each of the following questions.

Discuss whether you think each of the following actions (adapted from www.finaid.org/fafsa/maximize.phtml) to increase the chances of receiving financial aid is ethical.

(i)	Spend down the student’s assets and income first, before spending parents’ assets and income.

(ii)	Accelerate necessary expenses to reduce available cash. For example, if you need a new car, buy it before applying for financial aid.

(iii)

State that a truly financially dependent child is independent.

(iv)	Have a parent take an unpaid leave of absence for long enough to get below the “threshold” level of income.

What are some reasons why a company might want to overstate its earnings?

What are some reasons why a company might want to understate its earnings?

Under what circumstances might an otherwise ethical person decide to illegally overstate or understate earnings?

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