It is the end of 2019 and you are an accountant for Stone Company. During 2019, sales of the company’s products slumped and the company’s earnings are expected to be much less than those of 2018. The president comes to you with an idea. He says, “Our company’s property, plant, and equipment cost $300,000, and that is the amount we usually report on our balance sheet. However, I just had these assets appraised by an independent appraiser, and she says they are worth $400,000. I think that the company should report the property, plant, and equipment at this amount on its December 31, 2019, balance sheet and should report the $100,000 increase in value as a gain on the 2019 income statement. If we use this approach, it will show how much our company is really worth and increase our earnings. This will make our shareholders happy. What do you think?”
Required:
Prepare a written response to the president.
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Intermediate Accounting: Reporting And Analysis
- It is February 16, 2020, and you are auditing Davenport Corporation's financial statements for 2019 (which will be issued in March 2020). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenports accounts receivable is 50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2019 might be appropriate. Jim replies, Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2020, so lets wait and see what happens; we can always make an adjustment later this year. Our 2019 income and year-end working capital are not that high; our creditors and shareholders wouldnt stand for lower amounts than they already are. Required: From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.arrow_forwardAnton Blair is the manager of a medium-size company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts. Required 1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet? 2. Do you believe Blair’s recommendation to adjust the allowance for doubtful accounts is within his rights as manager, or do you believe this action is an ethics violation? Justify your response. 3. What type of internal control(s) might be useful for this company in overseeing the manager’s recommendations for accounting changes?arrow_forwardAnton Blair is the manager of a medium-sized company. A few years ago, Blair persuaded the owner to base a part of his compensation on the net income the company earns each year. Each December he estimates year-end financial figures in anticipation of the bonus he will receive. If the bonus is not as high as he would like, he offers several recommendations to the accountant for year-end adjustments. One of his favorite recommendations is for the controller to reduce the estimate of doubtful accounts. 1. What effect does lowering the estimate for doubtful accounts have on the income statement and balance sheet? 2. Do you believe Blair's recommendation to adjust the allowance for doubtful accounts is within his rights as a manager, or do you believe this action is an ethics violation? Justify your response. 3. What type of internal control(s) might be useful for this company in overseeing the manager's recommendations for accounting changes?arrow_forward
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- Sid Berhad year end is 31 December 2020. The accountant of Sid Berhad has asked for your opinion on the accounting treatment of the following items: (v) One of Sid Berhad’s product has suffered some bad publicity as a result of a customer claiming to have harm his health condition. The customer filed a court case in December 2020 claiming damages of RM100,000. Sid’s lawyer advised the company that the most probable outcome is that the company will have to pay the customer RM80,000. Required: Advise Sid Berhad’s accountant on the accounting treatments for all the above- mentioned items. Your answer shall make reference to relevant MFRS Standards.arrow_forwardMorlan Corporation is preparing its December 31, 2020, financial statements. Two events that occurred between December 31, 2020, and March 10, 2021, when the statements were issued, are described below. A liability, estimated at $160,000 at December 31, 2020, was settled on February 26, 2021, at $170,000. A flood loss of $80,000 occurred on March 1, 2021. What effect do these subsequent events have on 2020 net income?arrow_forwardCullumber Corp's controller was preparing the adjusting entries for the company's year ended December 31, 2023, when the vice- president of finance called him into her office. *Jean-Pierre," she said, "I've been considering a couple of matters that may require different treatment this year. First, the patent we acquired in early January 2021 for $591,000 will now likely be used until the end of 2025 and then be sold for $179,000. We previously thought that we'd use it for 10 years in total and then be able to sell it for $118,000. We've been using straight-line amortization on the patent." "Second, I just discovered that the property we bought on July 2, 2020, for $267,200 was charged entirely to the Land account instead of being allocated between Land ($62,200) and Building ($205,000). The building should be of use to us for a total of 20 years. At that point, it'll be sold and we should be able to realize at least $47,000 from the sale of the building." "Please let me know how these…arrow_forward
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