Question

In: Accounting

Phoenix Photography Company experienced a sharp decrease in Net Income during the year 2016. Madea Perry,...

Phoenix Photography Company experienced a sharp decrease in Net Income during the year 2016. Madea Perry, the owner of the company, anticipates a need for a Bank loan in the year 2017. Late in 2016, Perry instructed Reunion Mann, the accountant, and friend of his to record a R10, 000 sale of portraits to the Perry family even though the photos will not be shot until January 2017. Perry told Reunion not to make the following December 31 2016 adjusting entries

Salaries owed to employees R 20000

Prepaid insurance that has expired 2000

Required:

1. Compute the overall effect of these transactions on the company’s reported income for 2016. Is the reported net income overstated or understated.

2. Why did Madea take these actions? Are they ethical? Give your reason, identifying the parties that benefitted and those that were harmed by Madea’s actions.

Use the ethical decision making model which factor (economic, legal or ethical) seems to be taking precedence? Identify the stakeholders and potential consequences to each.

3) As a personal friend of Perry’s, what advice would you give to him?

Solutions

Expert Solution

1 Effects of the transactions on reported income:
(a) Sales Revenue overstated by 10000
(b) Salaries expense underreported by 20000
.(c) Insurance expenses underreported by 2000
Overall effect:
Income overreported by 32000 (10000+20000+2000)
2 Madea takes this action to get loan from the bank
This is not ethical. Accounting ethics is part of business ethics
Business must follow the Accounting Standatrds
As per accounting principle Revenues should be matched with expenses
in the given period to arrive at income for the period
Stakeholders like lenders and shareholders are harmed by this actions
In this case economic factor is taking precedence
3 As a friend, I would advice him to follow ethical behaviour
and prepare accounts as per standards.
He can give additional explanations to the stakeholders along with Financial Statements

ekkarill92 answered 1 year ago
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