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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’s 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 “rent expense” to “prepaid rent” 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: Journalizing transactions, posting journal entries to T-accounts, and preparing a trial balance

Vince York practices medicine under the business title Vince York, M.D. During July, the medical practice completed the following transactions:

Jul. 1 York contributed \(63,000 cash to the business in exchange for common stock.

5 Paid monthly rent on medical equipment, \)510.

9 Paid \(23,000 cash to purchase land to be used in operations.

10 Purchased office supplies on account, \)1,600.

19 Borrowed \(22,000 from the bank for business use.

22 Paid \)1,100 on account.

28 The business received a bill for advertising in the daily newspaper to be paid in August, \(240.

31 Revenues earned during the month included \)6,400 cash and \(6,000 on account.

31 Paid employees’ salaries \)2,200, office rent \(1,900, and utilities \)560. Record as a compound entry.

31 The business received \(1,120 for medical screening services to be performed next month.

31 Paid cash dividends of \)7,200.

The business uses the following accounts: Cash; Accounts Receivable; Office Supplies; Land; Accounts Payable; Advertising Payable; Unearned Revenue; Notes Payable; Common Stock; Dividends; Service Revenue; Salaries Expense; Rent Expense; Utilities Expense; and Advertising Expense.

Requirements 1. Journalize each transaction. Explanations are not required

Before you begin this assignment, review the Tying It All Together feature in the chapter. Part of the Fry’s Electronics, Inc.’s 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

3. What is the difference in how revenue is recorded in requirements 1 and 2? Clearly state when revenue is recorded in each requirement.

Identifying increases and decreases in accounts and normal balances Insert the missing information into the accounting equation. Signify increases as Incr. and decreases as Decr.

(a) ASSETS Retained Earnings Common Stock (d) Revenues Expenses Contributed Capital (g) (p) (h) Credit (k) Debit (l) Credit (i) (q) (j) Credit Incr. (r) (m) Credit Decr. (o) (f) Credit (c) LIABILITIES (b)

Journalizing transactions John Daniel opened a medical practice in Sacramento, California, and had the following transactions during the month of January.

Jan. 1 The business received \(34,000 cash and issued common stock to Daniel.

2 Purchased medical supplies on account, \)17,000.

4 Performed services for patients receiving \(1,600.

12 Paid monthly office rent of \)3,000.

15 Recorded $7,000 revenue for services rendered to patients on account.

Journalize the transactions of John Daniel, M.D. Include an explanation with each entry.

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

Terrence Murphy opened a law office on January 1, 2018. During the first month of operations, the business completed the following transactions:

Jan. 1 Murphy contributed \(78,000 cash to the business, Terrence Murphy, Attorney. The business issued common stock to Murphy.

3 Purchased office supplies, \)600, and furniture, \(1,700, on account.

4 Performed legal services for a client and received \)1,000 cash.

7 Purchased a building with a market value of \(130,000, and land with a market value of \)25,000. The business paid \(25,000 cash and signed a note payable to the bank for the remaining amount.

11 Prepared legal documents for a client on account, \)400.

15 Paid assistant’s semimonthly salary, \(1,120.

16 Paid for the office supplies purchased on January 3 on account.

18 Received \)2,700 cash for helping a client sell real estate.

19 Defended a client in court and billed the client for \(1,800.

25 Received a bill for utilities, \)600. The bill will be paid next month.

29 Received cash on account, \(1,500.

30 Paid \)1,200 cash for a 12-month insurance policy starting on February 1.

30 Paid assistant’s semimonthly salary, \(1,120.

31 Paid monthly rent expense, \)1,800.

31 Paid cash dividends of $2,200.

Requirements

  1. Record each transaction in the journal, using the following account titles: Cash; Accounts Receivable; Office Supplies; Prepaid Insurance; Land; Building; Furniture; Accounts Payable; Utilities Payable; Notes Payable; Common Stock; Dividends; Service Revenue; Salaries Expense; Rent Expense; and Utilities Expense. Explanations are not required.
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