1. Fast and Loose Company (F&L) reported net income of $3,250,000 for 2013. Duri

Question

1. Fast and Loose Company (F&L) reported net income of $3,250,000 for 2013. During 2014 it discovered that the company’s regional manager in one state had recorded fictitious revenue of $500,000 (it was recorded as accounts receivable at the time) in 2013.

a. Apart from firing the manager, what action should F&L take in 2014 for financial reporting purposes? How will it present the financial data in 2014?

b. What journal entry, if any, will F&L record in 2014 related to this fraud?

Explanation / Answer

question a.

The amount of fictitious assets should be written off immediately in order to give a true financial picture in the year 2014.

question b.

Debit Retained Earnings $500,000

Credit Accounts Receivable $500,000.

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