Net Total Total Owners’
Error Income Assets Liabilities Equity
NE U NE U
NE O O NE
U U NE U
UU O U
PROBLEM 3.8B10 Minutes, Difficult
Recorded the issuance of capital stock by
debiting Capital Stock and crediting Cash.
BLIND RIVER, INC.
Recorded the payment of an account payable
by debiting Cash and crediting Accounts
Payable.
Recorded the collection of an outstanding
account receivable by debiting Service Revenue
and crediting Accounts Receivable.
Recorded client billings on account by debiting
Service Revenue and crediting Accounts
a.
SOLUTIONS TO CRITICAL THINKING CASE
S
are delivered to the customers. (For practical purposes, the act of mailing the magazine may be
viewed as “delivery.”)
REVENUE RECOGNITION
Revenue is realized in the period that services are rendered to customers or goods are delivered to
customers. Using this principle as a guide, the three independent situations are analyzed below:
Period of flight. Airlines earn revenue by rendering a service—transportation—to their
customers. Therefore, revenue should be recognized in the accounting period in which this service
CASE 3.1
15 Minutes, Medium
a.
(1)
(2)
(3)
CASE 3.2
30 Minutes, Strong
Charging weekly expenditures for business supplies directly to expense is reasonable, but
MEASURING INCOME
Discussion of “fairness and reasonableness” of income measurement policies:
Given that most revenue is received in cash and that credit terms are constant, recognizing
revenue on a cash basis will cause little distortion in annual results. Thus, it appears “fair and
Morris’s salary of $60,000 is “fair and reasonable” because it has been agreed upon by both
ETHICS
,
FRAUD & CORPORATE GOVERNANC
E
It is certainly unethical, and probably illegal, for Ed Grimm’s boss to demand that Ed knowingly
engage in fraudulent reporting activities in order to retain his job. Ed may have been told that he would
be insulated from any responsibility or legal liability, but in reality, this may not be an acceptable
WHISTLE-BLOWING
CASE 3.3
5 Minutes, Easy
Education.
10 Minutes, Easy
A recent 10-K in the Investor Relations section of the company’s homepage shows that sales of
products to public sector clients has averaged approximately 22% of total sales (about the same as in
PC CONNECTION
CASE 3.
4
INTERNET
Education.