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 1. How did the change in the journal entries affect the net income of the company at year-end?

Short answer

The net income is the difference between revenue and expenses. A change in the journal entry will result in an increase in the net income.

Step-by-step solution

Step-by-Step SolutionStep 1: Definition of net income

The net income is defined as the income generated by the company after deducting all the expenses from the revenue of the company.

Change in the journal entry

In this case, the accounting manager of the company changed the journal entry. Earlier the accounting manager debited the rent expense but in the revised entry the accounting manager debited the prepaid expense. This will increase the net income as the rent expense is not recorded.