1. Fast and Loose Company (F&L) reported net income of $3,250,000 for 2013. Duri
ID: 2467163 • Letter: 1
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.
Required:
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?
2. C Co. reported a retained earnings balance of $200,000 at December 31, 2010. In September 2011, C’s auditors found that the company had recorded insurance premiums of $30,000 that it paid for the three-year period beginning January 1, 2010, as expense in 2010. C has a 30% income tax rate. What amount should C report as adjusted beginning retained earnings in its 2011 statement of retained earnings?
Explanation / Answer
a. Apart from firing the manager, F&L shall report this event in the notes to accounts.
It should present the financial data by correcting the net income i.e by decreasing the revenues and accounts receivable balances so that the financial statments provide a true and fair picture.
b. A rectification entry should be passed in relation to this fraud
Sales Debit $500000
Accounts Receivables Credit $500000
2. The insurance premium of $30000 contained insurance for a 3 year period. So, it should have been reported as $10000 as insurance expense and $20000 as prepaid insurance. But, $30000 has been shown as expense in 2010.
So, the tax savings on $20000, 20000 x 30% = $6000 should not have been taken by the company. So, the begining retained earnings in 2011 should be adjusted by $26000, $20000 for prepaid insurance and $6000 as the tax savings on it.
So, the beginning retained earnings in 2011 should show a balance of $200000 + $26000 = $226000.
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