Question 2 &nbsp

Question 2 [15 marks]

Phoenix Photography Companyexperienced a sharp decrease in NetIncome during the year 2016. MadeaPerry, the owner of the company,anticipates a need for a Bank loan in theyear 2017. Late in 2016, Perry instructedReunion Mann, the accountant, and friendof his to record a R10, 000 sale ofportraits to the Perry family even thoughthe photos will not be shot until January2017. Perry told Reunion not to makethe following December 31 2016adjusting entries

Salaries owed to employees R 20000 Prepaidinsurance thathasexpired 2000

Required:

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

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

Use the ethical decision makingmodel which factor (economic, legalor ethical) seems to be takingprecedence? Identify the stakeholders and potential consequences to each.

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

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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