Question

Question 2 [15 marks]
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?

Answer 1

1. Income would be overreported by $ 32000 post following transactions:

Sales revenue not earned	$ 10,000
Salaries expenses not recorded	$ 20,000
Insurance expenses	$ 2,000
	$ 32,000

2. Madea took the action to overcome the financial crisis and window dress the accounts so he can avail loan from the bank.

The adjustments made are not ethical as it violated the basic rule of accounting and gives wrongful presentation of the accounts.

The parties that were benifitted are Madea only as it will lead to show of better profit and can avail loan from the bank. Banks would be affected negatively along with the other stakefolders.

Here economic factor is taking precedence because the adjustments are done for availing loan and impact financial statements only.

3. As a friend of Perry I would suggest him not to resort to wrong financial practices and follow generic rules of business to increase profit by improving services to garnies more customers and reduce unnecessary expenses.