Beta Computer Equipment Company

Accounting Issues Case

Part A

On February 20, 20X4 you are well into the field work of the 12/31/20X3 audit and the following issues have arisen during the audit of Beta Computer Equipment Company (BCE.)

1. Service revenue

2. Account receivable from officers

3. Prepaid advertising

4. Alan Almond Company receivable

Linda Wilson the president of BCE wants you to present your position on each of these issues as she would like your judgment as to good GAAP numbers. But, she has also pointed out that she understands that GAAP often does not provide a precise answer, and in such cases, she would rather error on the side of maintaining income rather than being an overly pessimistic doomsayer. The attitude of Board of Directors members is consistent with that of Linda.

Prepare a memo that summarizes relevant professional standards (standard and paragraph should be cited) related to each of the 4 issues

and prepare any proposed journal entries. Discuss information that would be included in any note disclosures related to each of the four items (you need not draft formal note disclosures).

Prepare entries for all misstatements you identify, regardless of the amount involved. That is, dont simply say no entry is needed because any amount involved would be immaterial. Assume that the current income is $1,323,839. For purposes of preparing journal entries, you may ignore income tax implications as any changes in taxes will be reflected later in the audit process after any entries have been posted to the working trial balance.

Summarize the income effects (before taxes) of any entries that you propose on a schedule such as the following (make clear over and understatements of income) :

Income Effect

1. Unearned service revenue ____________

2. Account receivable from officers ____________

3. Prepaid advertising ____________

4. Alan Almond Company receivable ____________

Issue 1: Service Revenue

BCE has included service revenue of $22,100 as a result of a number of one year service policies sold late in December as an experiment. These service policies became effective on January 1, 20X4, or shortly thereafter.

The policies are sold at an average of $600 per year per customer; the $22,100 represents the total cash received as of year-end (debit cash, credit service revenue). The $600 per customer amount was arrived at by an analysis of previous service provided on a fee for service basis to customers. The average cost to BCE was approximately $200 per visit, with an average of 1.7 visits per year to customers. While the service policies allow unlimited visits for service, BCE has restricted the number of policies available due to difficulties in calculating the costs associated with such policies. BCE estimates that the number service calls is likely to increase to about 4 per year; the cost is expected to decrease to around $150 per call. So, at this point, the program is projected to break even. The aggressive pricing of the service policies is due to (1) the experimental nature of the program and (2) a desire to maintain long-term customer loyalty for future purchases of equipment.

What entry or disclosure, if any, is necessary in this circumstance?

Issue 2: Accounts Receivable From Officers

At year-end BCE has $110,000 in accounts receivables from officers on the books. The Board of Directors approved these loans which are in the form of demand notes. One of the staff assistants asked whether there was any intent to require officers to pay back these loans. Linda Wilson and Jan Wiggs, who each owe 1/2 of the total amount outstanding, agreed that while not much thought had been given to it, they imagined that they might someday repay the loans. On the other hand, they thought that the Board of Directors might forgive the loans some year in lieu of their annual bonus.

What entry or disclosure, if any, is necessary in this circumstance?

Issue 3: Prepaid Advertising

On November 1, 20X3 BCE paid $30,000 in advance for eight months of advertising on radio station KNEWZ, a local news station. The entry was recorded with a debit to prepaid advertising and a credit to cash. At December 31, 20X3 BCE expensed $7,500 (debit to advertising expense and credit to prepaid advertising for 2 of the 8 months). Earlier, on December 29, 20X3 BCE received a letter from KNEWZ indicating that the radio station was changing its format on January 1, 20X4 to classic heavy metal. In brief, news is being replaced by old songs of Phish, Ozzie Osbourne, and Metallica. It will now use the call letters KDEV.

Although BCE has no real data on this, it is managements impression that most Ozzie Osbourne fans buy fewer networked computer systems than news station listeners. Accordingly, management attempted to cancel the agreement and receive a refund. Regrettably, the contract for the advertising provides no assurances about a change in station format and BCEs lawyers say that obtaining any recovery in a court proceeding is doubtful. KDEV has refused any attempts at renegotiation and has suggested that BCE might be surprised at the number of customers that might respond to the commercials. KDEV is even willing to work with BCE to redo commercials eliminating the old ones that used the sappy sounding news announcers and replacing them with commercials using their new announcers; KDEV is willing to record these commercials for no additional cost. BCE management still questions whether the advertising will be well placed, but does believe that there may be a few listeners who might respond to the advertisement. BCE legal counsel suggests that it is not worth pursuing this matter further.

What entry or disclosure, if any, is necessary in this circumstance?

Issue 4: Alan Almond Receivable

Alan Almond Company (Alan Almond) owes BCE $82,000 for a computer system installation that was purchased in March of 20X3. Alan Almond has run into financial difficulties due to dramatic decreases in the selling price of almonds during recent years. In August of 20X3 Linda Wilson (BCE president) and Jan Wiggs (BCE controller) established a repayment schedule in which Alan Almond would repay $10,000 per month (plus interest). While the first payment was made in September (bringing the debt down from $92,000 to $82,000), no further payments have been received. (Alan Almond has continued to make small purchases from BCE on a cash basis.)

Your discussion with management indicates that Alan Almond received a going concern modification from its auditors for the year ended 8/30/X3 (the audit report was dated 10/22/X3). The going concern modification arose due to a question concerning whether Alan Almond can obtain new financing when needed, on June 30, 20X4. However, the situation is not entirely bleak for Alan Almonds future as layoffs of 1/3 of the companys employees resulted in a situation in which Alan Almond operated at break even for the year ended 8/30X3. Alan Almond has discussed filing for bankruptcy with bankruptcy legal counsel and at this point believes it is unnecessary. But, if it becomes necessary, counsel suggests that creditors shouldnt expect to receive more than 50 cents on the dollar. Management has suggested to you that 70 cents on the dollar is more likely if bankruptcy ensues. Your analysis at the date of both the Alan Almond audited annual statements (8/30/X3) and the interim statements (11/30/X3) indicates that if bankruptcy is declared, a recovery of 50-60 cents on the dollar (with no amount more probable than another in that range) is likely. Yet, its difficult to know what the situation will be in the future.

The sales agreement for the computer system allows BCE to repossess the equipment at any time prior to bankruptcy. But, because the equipment is used and specific to Alan Almonds applications, management believes that the equipment could be sold for a (net) of between $20,000 and $30,000. Also, management points out that such an action would not be considered positively by either Alan Almond or a number of other companies that BCE is attempting to attract as clients. Accordingly, BCE has resisted this option and does not intend to pursue it at this time.

Your analysis of the interim statements (unaudited) reveals that Alan Almond operated at a slight profit during the first quarter and that almond prices have increased approximately 15 percent. However, experts disagree widely as to future almond prices as there is some concern that a significant increase in almonds from India may enter the US market. Finally, Alan Almonds management, although noncommittal on details, suggests that it believes that it will be able to continue repayments on the debt within the next few months. But your feeling is that it is probable that Alan Almond will be forced to file for bankruptcy.

No allowance for this account is currently included in the allowance for doubtful accounts.

What, if any, loss reserve (and/or note disclosure) should be reflected in the financial statements?

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BCE Accounting Issues Case, Page 6

Copyright 2022 McGraw Hill. All rights reserved. No reproduction or distribution without the prior written consent of McGraw Hill. Beta Computer Equipment Company

Accounting Issues Case

Part B

1. Assume a 30% tax rate, and the Totals per financial statements provided. Complete the following schedule as per Figure 16.4 (p. 718) in the text. Assume that the Totals per financial statements (second to bottom row) have appropriately been entered on this schedule from the financial statements.

2. Assume that the client does not intend to record any of the above misstatements and that 6 percent of income after taxes is considered a material misstatement. Provide the auditors conclusion in this situation. Only consider the income effect.

3. Assume that the client does intends to record correcting entries for each above misstatement. Provide the auditors conclusion in this situation.

94

BCE Accounting Issues Case, Page 6

Copyright 2022 McGraw Hill. All rights reserved.

image1.png Sheet1

Beta Computer Equipment Company

Total Likely Misstatement

December 31, 20X3

Debit (Credit)

Assets

Liabilities

Income Statement

Number

Type

Current

Non-current

Current

Non-current

Revenue

Cost of Sales

Selling, Gen. Admin.,Other

Income

1

2

3

4

Total Uncorrected

Tax effect at 30% on current liab.

After Tax Effect on Income

Totals per financial statements

9,206,553.00

1,237,543.00

6,239,932.00

2,400,000.00

82,000,000.00

71,000,406.00

8,002,378.00

1,323,839.00

Percent of unrrecorded to f.s.

SHOW MORE…

statistic

assignment

Week 3

Age

Gender

For the following questions, use only the “age” column:

30

M

17

F

Points

Age Frequency Distribution:

Class Width

5

25

F

38

F

Class Limits

Midpoint

Freq.

Relative Frequency

Cumulative Relative Freq

18

M

Low

High

22

F

Limits

2

17

22

19.5

7

0.3684

0.3684

41

F

Freq.

2

23

28

25.5

4

0.2105

0.5789

42

F

Mid.

2

29

34

31.5

2

0.1053

0.6842

18

M

RF

2

35

40

37.5

3

0.1579

0.8421

22

M

CF

1

41

46

43.5

3

0.1579

1.0000

25

M

20

M

2

Mean

28.26

*Round to two decimals

24

M

2

Median

25

*Round to one decimal

30

M

2

Sample Standard deviation:

9.14

*Round to two decimals

18

M

2

Q1

20

*Round to one decimal

36

F

2

Q3

38

*Round to one decimal

44

F

39

F

28

M

Ogive:

3

Polygon

3

Ogive:

Polygon:

Midpoint

Cumulative Relative Freq

Total:

25

19.5

0.3684

25.5

0.5789

31.5

0.6842

37.5

0.8421

43.5

1.0000

Help for this spreadsheet

Review 2.2, 3.1 3.3 of your text. Also watch Excel Videos in BlackBoard.

Your data is already copied into columns A and B.

Only cells in yellow need to be completed.

Choose a class width according to the following equation (rounded up to whole number):

CLASS WIDTH = (MAX VALUE – MIN VALUE)/# of Classes (5)

The ogive and polygon graphs need to be included on this page under the headers below. Please do not put them on a separate page.

Polygon

19.5 25.5 31.5 37.5 43.5 7 4 2 3 3

Midpoints

Frequency

Ogive

19.5 25.5 31.5 37.5 43.5 0.36842105263157893 0.57894736842105265 0.68421052631578949 0.84210526315789469 1

Midpoints

Cumulative Freq.

Week 5

Note: The goal of the project is to practice making a confidence interval for a mean and proportion with real data. Do not worry about failed assumptions tests and do not make corrections for small sample size. Use primary methods described in text and used on homework.

Age

Gender

Points

95% Confidence Interval for Average Age of Online College Students:

30

M

17

F

Sample Mean:

28.26

Note: Calculation cells should list the numbers and operations used to get your answers. Do not put the generic formula and show all calculation steps.

25

F

Sample St. Dev:

9.14

Normal Distribution

38

F

1

Sample Size:

19

T-Distribution

18

M

22

F

2

Distribution:

T-Distribution

41

F

42

F

2

Critical Value:

0.05

*2 decimals

18

M

22

M

2

Margin of Error:

4.04

*2 decimals

Calculation:

(9.14/19)*1.96

25

M

1

Lower Bound:

24.22

*2 decimals

Calculation:

28.26-1.96*(9.14/19)

20

M

1

Upper Bound:

32.3

*2 decimals

Calculation:

28.26+1.96*(9.14/19)

24

M

30

M

Interpret (context)

We are 95% confidence that the age of online college students is between 32 and 24 years.

18

M

2

36

F

44

F

95% Confidence Interval for Proportion of Male Online College Students:

39

F

28

M

1

Sample Size:

19

1

Number of Males:

10

2

Male Proportion:

0.5263

Female Proportion

0.4737

*4 decimals

Midpoint

Cumulative Relative Freq

2

Distribution:

Normal Distribution

19.5

0.3684210526

2

Critical Value:

1.96

*2 decimals

25.5

0.5789473684

31.5

0.6842105263

2

Margin of Error:

0.2245

*4 decimals

Calculation:

1.96*0.526(1-0.526)/19

37.5

0.8421052632

1

Lower Bound:

0.3017

*4 decimals

Calculation:

0.5263-0.2254

43.5

1

1

Upper Bound:

0.7517

*4 decimals

Calculation:

0.5263+0.2254

Interpret (context)

We are 95% confident that the proportion of male online college students is between 0.3017 and 0.7517

2

25

Total Points

Help for this spreadsheet

Review 8.2 of your text as well as the Project Help tab below for the first confidence interval calculation (mean). Also watch Excel videos in BlackBoard.

Review 8.3 of your text as well as the Project Help tab below for the second confidence interval calculation (proportion). Also watch Excel videos in BlackBoard.

“Show Your Calculation” – these cells should list the numbers and operations used to get your answers. Do not just put the general formula and show all calculation steps. Do not put “=” in formulas so I can see the formula by just looking at the cell, not opening it.

For the “Interpret” text, what can we conclude about the population mean age and the population male proportion of online students with respect to these bounds?

Your data for Columns A and B will link from the Week 3 tab on this spreadsheet – no need to re-input!

The green cells (G3 and G4) will link from the Week 3 tab on this spreadsheet.

Only cells that are yellow need to be completed.

Please note rounding for calculations!

Week 6

Note: The goal of the project is to practice conducting a hypothesis test for a mean and proportion with real data. Do not worry about failed assumptions tests. Use primary methods described in text and used on homework.

For the following two hypothesis tests, use alpha = .05

Points

Claim: The average age of online students is 32 years old. Can you prove it is not?

Normal Distribution

1

Ho:

32

Note: Calculation cells should list the numbers and operations used to get your answers. Do not put the generic formula and show all calculation steps.

T-Distribution

2

Ha:

32

Sample mean:

28.26

Sample St. Dev:

9.14

2

Distribution:

T-Distribution

Reject Ho

2

Test Statistic:

-1.78

*2 decimals

Calculation:

(28.26-32)/(9.14/19)

Fail to Reject Ho

2

p-value:

0.221

*4 decimals

1

Decision:

Fail to Reject Ho

z

2

Interpretation: (context)

There is no enough evidence to show that the mean age of online students is equal to 32years at 0.05 level of significance

Claim: The proportion of males in online classes is 35%. Can you prove it is not?

1

Ho:

35%

2

Ha:

35%

Sample Proportion Males

0.5263

Sample Proportion Females

0.4737

2

Distribution:

T-Distribution

3

Test Statistic:

1.61

*2 decimals

Calculation:

(0.5263-0.35)/(0.35(1-0.35)/19)

2

p-value:

0.339

*4 decimals

1

Decision:

Reject Ho

2

Interpretation: (context)

At 0.05 confidence level we conclude that there is insufficient evidence to show that proportion of males in online classes is 35%

25

Total Points

0.234

Helps for this spreadsheet:

Review 9.1 of your text as well as the Project Help tab below for stating your null and alternate hypotheses.

Review 9.3 of your text as well as the Project Help tab below to do a hypothesis test for a population mean. Also watch the Excel videos.

Review 9.4 of your text as well as the Project Help tab below to do a hypothesis test for a population proportion. Also watch the Excel videos.

“Show Your Calculation” – these cells should list the numbers and operations used to get your answers. Do not just put the general formula and show all calculation steps. Do not put “=” in formulas so I can see the formula by just looking at the cell, not opening it.

For the “Interpret” text, what can we conclude about the null hypothesis with respect to the evidence produced by the hypothesis test? What does this mean about the average age and male proportion of all online college students?

The green cells (E8 and E9) will link from the Week 3 tab on this spreadsheet.

The green cells (F24 and J24) will link from the Week 5 tab on this spreadsheet.

Only cells that are yellow need to be completed.

Please note rounding for calculations!

Project Help

TI-84 PLUS VIDEO HELPS FOR STATS PROJECT

Week 3: Project Part 2 – Descriptive Statistics

How do I do a frequency distribution?

Chapter 2, Section 2: Frequency Distributions and Histograms for Quantitative Data

What do I need to know about a frequency polygon and ogive?

Chapter 2, Section 2: Frequency Polygons and Ogives

How do I calculate the mean and median?

Chapter 3, Section 1: Mean and Median on the TI-84 Plus

How do I calculate the standard deviation?

Chapter 3, Section 2: The Variance and Standard Deviation on the TI-84 Plus

How do I calculate the quartiles, Q1 and Q3?

Chapter 3, Section 3: Quartiles and the Five Number Summary on the TI-84 Plus

Week 5: Project Part 3 – Confidence Intervals

How do I determine what type of distribution is being used? (View at 8:45 into video)

How do I create a confidence interval for a population mean?

Chapter 8, Section 2: Confidence Intervals for a Population Mean with Standard Deviation Unknown (TI-84 PLUS)

Chapter 8, Section 2: Exercise Video – Confidence Interval for the Mean with Sigma Unknown (TI-84 PLUS)

How do I create a confidence interval for a population proportion?

Chapter 8, Section 3: Confidence Intervals for a Population Proportion (TI-84 PLUS)

Chapter 8, Section 3: Exercise Video – Confidence Interval for a Proportion Using the TI-84 PLUS

Week 6: Project Part 4 – Hypothesis Testing

How to I write my null and alternate hypotheses?

Chapter 9, Section 1: Null and Alternate Hypotheses

Chapter 9, Section 1: Exercise Video – State the Null and Alternate Hypothesis

How do I do a hypothesis test for a population mean?

Chapter 9, Section 3: Hypothesis Tests for a Population Mean (SD Unknown, P-Value Method Using TI-84 PLUS)

Chapter 9, Section 3: Exercise Video – Hypothesis Test for Mean with Sigma Unknown – P-Value Method (TI-84 PLUS)

How do you do a hypothesis test for a population proportion?

Chapter 9, Section 4: Hypothesis Tests for a Population Proportion (P-Value Method Using the TI-84 PLUS)

Chapter 9, Section 4: Exercise Video – Hypothesis Test for Proportions – P-Value Method (TI-84 PLUS)

How do I come to a decision and state my interpretation once I have done my hypothesis test?

Chapter 9, Section 1: Stating Conclusions in a Hypothesis Test

Each of the following that have a Chapter/Section Reference can be found in Connect Math. Click on RESOURCES, VIDEOS and then choose the chapter and section. Then find the name of the listed video to view.