WorldCom Scandal:

By Heshani Makalande, Nahee Kim and Yutong Ouyang

Formation:

• It was an American telecommunication company founded in 1963
• The corporation was purchased by Verizon Communications after its bankruptcy in the year 2006
• Formerly known as LDDS and WorldCom
• The corporation is currently operating as MCI Inc

Timeline:

• 1985:- investor Bernard Ebbers becomes the CEO
• 1995:- LDDS acquires WilTel Inc for $2.5 billion and changed its name to WorldCom Inc

• 1998:- WorldCom completes three mergers

MCI Communications Corporation ($40 billion)

Brooks Fiber Properties Inc ($1.2 billion)

CompuServe Corp ($1.3 billion)

• 2002:-
• CEO Bernard Ebbers resign, vice chairman John Sidgmore reins

Fires Scott Sullivan (CFO)

SEC files fraud charges against W.C

EX-CFO Sullivan and former controller David Myers are arrested and were found guilty

• 2003:-

Changes its name to MCI and appoints Robert Blakely as (CFO)

Settles SEC charges

First criminal charges against (F.CEO) Ebbers

 

People Involved:

Bernard Ebbers

• He is a Canadian born businessman
• Former WorldCom CEO in U.S.
• Co-founder of WorldCom 1995
• Manipulating an $11 billion accounting fraud
• Sentenced to 25 years in prison

Cynthia Cooper

• Vice President of Internal Audit at WorldCom
• Found out the accounting fraud in WorldCom

Scott D. Sullivan

• Chief Financial Officer, Treasurer, Board member and Secretary
• Performed WorldCom’s $11-billion accounting fraud
• Sentenced to five years in Jail

The Accounting Scandal:

• Biggest accounting fraud in U.S history after Enron
• In 2005: Nine Counts

◦      One count of conspiracy

◦      One count of securities fraud

◦      Seven counts of filing false statement with securities regulator

• Improperly accounted for more than $3.8 billion of expenses
• Laid off 17,000 workers within the week

Stocks:

• In 2002, Stock started to decline

◦      Falling of earnings in 2000’s

◦      Ebbers’ enormous personal debts

( WorldCom board loans him $375 million US)

◦      Accounting Fraud

◦      Stocks free-fall (dropped more than 95%)

◦      Peak more than $80 to almost nothing

Bankruptcy:

• On July 21, 2002, after revealing actual condition of the WorldCom, the company files for the largest bankruptcy in corporate history in a month
• Reported more than $107 billion in asset and $41 billion in debt

 

Impact on the accounting profession

Sarbanes- Oxley Act

• It is a United States federal law established on July 30, 2002
• The Sarbanes-Oxley Act is enforceable
• It improve criterion for all American public company boards, management and public accounting firms

Public Company Accounting Oversight Board (PCAOB)

• It is created due to many weighty accounting scandals
• PCAOB goals promoting ‘informative, fair, independent audit reports’.
• Any accounting firm that audit a public company must register under the PCAOB
• PCAOB has power to investigate accounting infractions

Future Outlook

• Form a separate audit committee apart from the company’s management and the company’s auditors to oversee the company’s financial management
• In the long run, the company’s share prices would be undervalued, therefore the company should focus on building trust within the investors

 

Works Cited:

CBC News Online.(2006). The WorldCom story. March 28,2011,
<http://www.cbc.ca/news/background/worldcom/>

Dennis M and Edward R. WorldCom^. March 28, 2011.<http://www.scu.edu/ethics/dialogue/candc/cases/worldcom.html>

Erika Johansen. “Role of the Public Company Accounting Oversight Board”. Ehow.com. March 26, 2011 http://www.ehow.com/about_6547956_role-company-accounting-oversight-board.html

Fox News.com. MCI-WorldCom Timeline. 2005. March 29^, 2011.http://www.foxnews.com/story/0,2933,150521,00.html

Luisa B. (2002). WorldCom files largest bankruptcy ever. March 30,2011.<http://money.cnn.com/2002/07/19/news/worldcom_bankruptcy/>

Pulliam, Susan; Deborah Soloman. “How Three Unlikely Sleuths Exposed Fraud at WorldCom: Firm’s Own Employees Sniffed Out Cryptic Clues and Followed Hunches”. Wall Street Journal. March 25, 2011 http://www.happinessonline.org/MoralCode/LiveWithTruth/p23.htm

Simron R. and Rive A. D. A. (2002). WorldCom’s Collapse. March 30, 2011. <http://query.nytimes.com/gst/fullpage.html?res=9C04E6D81738F931A15754C0A9649C8B63>

The Sarbanes-Oxley Act. Web. 10 Mar. 2011. http://www.soxlaw.com

YouTube video http://www.youtube.com/watch?v=7g_d-phoUrU

 

 

 

 

 

 

 

Forensic Accounting

Forensic Accounting:

What is Forensic Accounting?

• Forensic accounting is an accounting field that specializes in investigations and auditing.
• provides an accounting analysis that is suitable to the court which will form the basis for discussion, debate and ultimately dispute resolution
• Forensic accountants are trained to look beyond the numbers and deal with the business reality of the situation.
• Litigation support: Assistance in obtaining documentation necessary to support or refute a claim, and check validity of evidence
• Investigative accounting: Review of company’s accounting to find appropriate course of action in various situations

What is Forensic Accounting Used For?

• -any type of situation where accounting is suitable for legal review
• -Purpose: establishing accountability and/or evaluation
• -Some situations include:
• Bankruptcy
• Divorce cases
• probate asset identification and evaluation (wills)
• -falsifications and manipulations of accounts or inventories
• statutory auditing

Terminology:

Forensic Investigation -The utilization of specialized investigative skills in carrying out an inquiry conducted in such a manner that the outcome will have application to a court of law.  A Forensic Investigation may be grounded in accounting, medicine, engineering or some other discipline.

Forensic Audit- An examination of evidence regarding an assertion to determine its correspondence to established criteria carried out in a manner suitable to the court.  An example would be a Forensic Audit of sales records to determine the quantum of rent owing under a lease agreement, which is the subject of litigation.

Internal Audit- An audit performed by an employee who examines operational evidence to determine whether prescribed operating procedures have been followed.

External Audit- An audit performed by an auditor engaged in public practice leading to the expression of a professional opinion which lends credibility to the assertion under examination.

Rise In Forensic Accounting:

• Financial Crisis 2007
• difficult economic climate
• forensic accounting: counter cyclical profession
• frauds and commercial disputes rise as pressure is put on individuals and corporations to stop falling revenues or incomes, and maintain profit levels
• no pressure or oversight on executives or financial
• controllers during the good financial times

Forensic Accountants Work Habits

• Each forensic assignment unique

Steps to Completing Forensic Accounting assignment:

1.) Meet with client

2.) Conflict Check

3.) Initial investigation

4.) Create Action Plan

5.) Obtain Relevant evidence

6.) Analyzation of evidence

Some tasks involved in the analyzation of evidence include:

• calculating economic damages
• summarizing a large number of transactions;
• performing a tracing of assets;
• performing present value calculations utilizing appropriate discount rates;
• performing a regression or sensitivity analysis;
• utilizing a computerized application such as a spread sheet, data base or computer model; and
• utilizing charts and graphics to explain the analysis.

To Be A Forensic Accountant:

• Must be persistent, organized, confident, and have a good discretion
• Undergraduate degree
• Work experience
• CA•IFA (Certified Accountant Investigative and Forensic Accounting)
• DIFA (Diploma in Investigative and Forensic Accounting)
• CPFA (Certified Professional Forensic Accountant)

Citations:

“About Forensic Accounting.” The Institute of Certified Forensic Accountants :: Welcome Page. 2011. Web. 31 Mar. 2011. <http://www.forensicglobal.org/&gt;.

Edwards, R. T. “What Is Forensic Accounting?” R.T. Edwards, Inc. 2003. Web. 31 Mar. 2011. <http://www.rtedwards.com/journals/JFA/students.html&gt;.

Florida Atlantic University. “Forensic Accounting.” Forensic Accounting Information. Web. 31 Mar. 2011. <http://www.forensic-accounting-information.com/&gt;.

Pirraglia, William. “Definition of Forensic Accounting | EHow.com.” EHow. 2011. Web. 31 Mar. 2011. <http://www.ehow.com/about_4705508_definition-forensic-accounting.html&gt;.

“The Rise of Forensic Accounting.” Forensic Accounting. Corporate UK, 2009. Web. 31 Mar. 2011. <http://www.cvdfk.com/documents/Forensic_Accounting_Feb09.pdf&gt;.

“Vision and Mission | Chartered Accountants of Canada.” Home | Chartered Accountants of Canada. Web. 31 Mar. 2011. <http://www.cica.ca/about-the-profession/vision-and-mission/index.aspx&gt;.

Zysman, Alan. “Forensic Accounting.” Forensic Accounting Demystified. 2006. Web. 31 Mar. 2011. <http://www.forensicaccounting.com/home.html#fourteen&gt;.

 

 

Answers for Review Questions

6-2b

chapter 7 questions

 

Issues Presentation – Arthur Andersen

Accounting Issue: Arthur Andersen’

By: Paul Huynh and Sophia Truong

• Arthur Andersen was charged with obstructing justice for shredding and erasing information from documents relating to the audit of Enron
• Later, investigations also found that a memo relating to Enron’s loss was also altered
• David Duncan, partner of Arthur Andersen, and Nancy Temple, Arthur Andersen’s lawyer, were major players in the Arthur Andersen scandal
  • David Duncan, who was the Andersen partner overseeing the Enron audit, pleaded guilty to the obstruction of justice, however he testified that an email from Nancy Temple, an Arthur Andersen lawyer, had influenced his decision to shred the documents
  • There was an email from Temple to Duncan to delete Andersen’s objection to the use of “non-recurring” by Enron on its loss
  • From when Arthur Andersen was first charged with obstruction of justice, the clients started leaving to find other accounting firms
  • On April 9, 2002, Duncan admitted to the shredding and erasing of the documents and pleaded guilty to obstruction of justice at court
  • Arthur Andersen was found guilty of obstruction of justice on the 15^th of June, 2002 and the jury made their decision based on the destruction and altering of documents and also the omission of Duncan’s disagreement to the information on documents about Enron’s losses
  • On October 16, 2002, the Arthur Andersen firm was fined $500 000 and given five years probation
  • Arthur Andersen had stopped auditing public clients as of August 31, 2002
  • As of 2011, Arthur Andersen has not been dissolved and has not declared bankruptcy, however does not exist as an accounting entity anymore
  • The ownership of this firm has been left to four individual partners, who have created limited liability corporations
  • Impact on Accounting
    • New audit rules were made:
      • Statement on auditing standards 112
      • There was the enactment of Sarbanes – Oxley
        • Prohibits the knowing destruction of documents that relate to jurisdiction of any department or agency of the United States
    • The reputation of accounting is less reliable
    • Future outlook of accounting
      • More auditing rules will probably be made to decrease the possibility of manipulation of the books of companies, and to try to keep the accounting reputation from being more tarnished

Citation

Fox, L. (2003). Enron: The Rise and Fall. Hoboken, New Jersey: John Wiley & Sons, Inc.

Toffler, B. L., & Reingold, J. (2003). Final Accounting: ambition, greed, and the fall of Arthur Andersen. New York, NY: Broadway Books a division of Random House, Inc.

Squires, S. (2003). Inside Arthur Andersen: shifting values, unexpected consequences. Upper Saddle River, New Jersey: Pearson Education, Inc.

Sachdev, A. (2003, May 22). Conference center last resort for Andersen. Chicago Tribune.
Retrieved March 4, 2011, from Chicago Tribune archive
< http://www.chicagotribune.com/business/chi-0305220361may22,0,7603044.story&gt;

Thomas, C. B. (2002, June 18). Called to Account. Time.
Retrieved March 4, 2011, from Time archive
< http://www.time.com/time/business/article/0,8599,263006,00.html&gt;

Carpenter, D. (2002, June 28). Arthur Andersen At Center Of Scandal Again.
Retrieved March 4, 2011, from CRN databases
< http://www.crn.com/news/channel-programs/18828554/arthur-andersen-at-center-of-scandal-again.htm;jsessionid=eFRhXioQgjVU1vrTQTTISA**.ecappj01&gt;

Kyle, R. H., (2005, September). Lessons Learned From The Arthur Andersen Case.
Retrieved March 7, 2011, from
< http://www.fredlaw.com/articles/whitecollar/whit_0509_rhk.html&gt;

 

Issues Presentation – Enron Scandal

Enron Scandal – What Went Wrong?

By: Rita Chen and Sahana Sellathurai

 

Enron Scandal

–          an energy company at Houston, Texas

–          was formed in 1985 and merged with InterNorth

–          was one of the world’s leading electricity, natural gas, communications and pulp and paper companies

–          from 1996 – 2000, Enron was named “America’s most innovative Company” by Fortune magazine

–          had claimed revenues of $101 billion dollars in 2000

–          Overstated revenues by 1.2 billion dollars

–          One of the biggest audit failures ever

–          One of the Big 5 auditing companies, Arthur Andersen also collapsed

–          Tried to destroy/shred documents showing evidence of bad auditing and carelessness

 

Timeline

1985

–          Kenneth Lay and Sam F. Segnar merge Houston Natural Gas and InterNorth (more than 37 000 miles of pipeline).

 

1989

–          They begin trading natural gas commodities. Later become the largest natural gas merchant in North America and branch out into trading other commodities such as water, coal and steel.

 

2000

–          Launch EnronCredit.com – buys and sells credit risk to help companies manage the risk in trading.

–          Enron stock peaks at a record high of $90/share

 

2001

–          Report a third-quarter loss of about $640 million

–          Securities and Exchange Commission starts a formal investigation.

–          Enron accounts losses of $586 million

–          Enron files for Chapter 11 bankruptcy protection (more than 4000 workers will be laid off

 

2002

–          The U.S. Justice Department verifies that it has begun a criminal investigation on Enron’s bankruptcy

–          Former Enron auditor Arthur Anderson indicted for obstruction of justice fr destroying Enron-related documents

–          David Duncan, Arthur Andersen’s former top Enron auditor pleads guilty to obstruction of justice

–          Andersen was sentenced to probation and banned from auditing public companies

 

2003

–          Enron announces that it will emerge from bankruptcy as 2 sepearate companies with different names

–          Enron files its bankruptcy reorganization plan and says that most creditors will receive about 1/5 of the estimated $67 million that they owe

 

2004

–          Initial approval of Enron’s plan for bankruptcy reorganization ( creditors would receive $11 billion in cash and stocks)

–          Andrew and Lea Fastow plead guilty

–          Andrew: 10 year prison sentence, forfeit $23.8 million

 

2005

–          Enron broadband trial begins

–          Overturn the conviction of the Arthur Andersen accounting firm

 

2007

–          Enron completes sale of shareholding in to Ashmore Energy International

–          Enron changes corporate name to Enron Creditors Recovery Corporation (doing business as Enron Corporation)

People Involved

Andrew Fastow

–          Former CFO

–          Created Special Purpose Entities to hide debts

–          Sentenced to 6 years in jail in 2006

–          Wife also sentenced to 12 months in jail for filing false tax returns

 

Kenneth Lay

–          Former CEO of Houston Natural Gas

–          Became CEO of Enron and chairman a year later

–          Found guilty of 6 counts of conspiracy and fraud

–          Before he could be sentenced he died of a heart attack in 2006

Jeff Skilling

–          Former president and chief operating officer

–          Driving force behind turning Enron from a natural gas pipeline company into energy trading powerhouse

–          Became CEO for only 6 months before resigning in August 2001 and selling all of his shares

–          Sentenced in 2006 to 24 years, 6months in jail

 

Mark to Market Accounting

–          Instead of going by the cost principle, assets were valued at their market price

–          Assets were vastly overstated

–          There were fewer standards for energy so market value was hard to control and determine

Special Purpose Entities

–          Entity created by a company for special purposes

–          Could be used to transfer debts outside of the company and would not show up on the balance sheet

–          Used by Andrew Fastow to conceal debts

–          Used shares as collateral or compensation for companies who faced risks

–          Andrew Fastow used it for debts and assets that were quickly decreasing in value

 

Impact on Accounting Profession

Sarbanes –Oxley Act of 2002

–          put in place after the Enron scandal

–          purpose is to prevent big companies from committing accounting fraud

–          gives more power to consumers by forcing publicly traded companies to disclose everything to their shareholders

–          increases/creating prison time for scandals

 

Public Company Oversight

–          created to take over the task of regulating the profession from its members

–          new regulations that require CFOs and CEOs to sign statements proving to the accuracy of their financial records

–          it restricted public accounting firms from providing any non-auditing services when auditing

–         

Changes in the Stock Exchange

–SEC called for changes in the stock exchanges’ regulations

–New York Stock Exchange declared a new governance proposal

Provision includes:

–          all firms must have a majority of independent directors

–          all audit committee members should be financially literate

–          at least one member of the audit committee should have accounting or related financial management expertise.

–          in addition to regular sessions, the board is required to have extra sessions without management

http://www.youtube.com/watch?v=saBOAGzAY9E

 

Works Cited

“Accounting for Special Purpose Entities Revised: FASB Interpretation 46(R).” NYSSCPA.ORG | The Web Site of the New York State Society of CPAs. Web. 10 Mar. 2011. <http://www.nysscpa.org/cpajournal/2004/704/essentials/p30.htm&gt;.

“Enron: Companies.” Lycos. Web. 10 Mar. 2011. <http://www.lycos.com/info/enron–companies.html&gt;.

“Enron Timeline.” AGSM MBA & AGSM Executive Programs – Australian School of Business – UNSW. Web. 10 Mar. 2011. <http://www.agsm.edu.au/bobm/teaching/BE/Enron/timeline.html&gt;.

The Sarbanes-Oxley Act 2002. Web. 10 Mar. 2011. <http://www.soxlaw.com/&gt;.

“CBC News Indepth: Enron.” CBC.ca – Canadian News Sports Entertainment Kids Docs Radio TV. Web. 11 Mar. 2011. <http://www.cbc.ca/news/background/enron/&gt;.

Cunningham, By. “ENRON AND ARTHUR ADNDERSEN: THE CASE OF THE CROOKED E AND THE FALLEN A – Global Perspectives on Accounting Education Articles | Find Articles at CBS MoneyWatch.com.” Find Articles at BNET | News Articles, Magazine Back Issues & Reference Articles on All Topics. Web. 11 Mar. 2011. <http://findarticles.com/p/articles/mi_qa5524/is_200601/ai_n21393163/?tag=content;col1&gt;.

“How Fastow Helped Enron Fall – TIME.” Breaking News, Analysis, Politics, Blogs, News Photos, Video, Tech Reviews – TIME.com. Web. 11 Mar. 2011. <http://www.time.com/time/business/article/0,8599,201871-1,00.html&gt;.

“Enron’s Collapse: The Fall Of A Wall Street Darling.” Investopedia.com – Your Source For Investing Education. Web. 11 Mar. 2011. <http://www.investopedia.com/articles/stocks/09/enron-collapse.asp&gt;.

Thomas, C. William. “The Rise and Fall of Enron.” Journal of Accountancy. Web. 11 Mar. 2011. <http://www.journalofaccountancy.com/Issues/2002/Apr/TheRiseAndFallOfEnron.htm&gt;.

Long, Scott. “TransActions.” GDS Associates, Inc. Web. 11 Mar. 2011. <http://www.gdsassociates.com/news/transactions/vol202.html&gt;.

“Enron Corp. – Timeline of the Rise and Fall of Enron Corp. | Chron.com – Houston Chronicle.”Houston News, Entertainment, Search and Shopping | Chron.com – Houston Chronicle. Web. 11 Mar. 2011. <http://www.chron.com/news/specials/enron/timeline.html&gt;.

Fox, Loren. Enron: the Rise and Fall. Hoboken, NJ: Wiley, 2003. Print.

Dumortier, By Alex. “Mark-to-Market Accounting Basics.” Fool.com: Stock Investing Advice | Stock Research. Web. 11 Mar. 2011. <http://www.fool.com/investing/dividends-income/2008/10/02/mark-to-market-accounting-what-you-should-know.aspx&gt;.

 

 

Answers for Review Questions

Here are the Review Answers for questions 4-6B and 5-12A which I really hope are the questions I assigned you.  If they aren’t, someone email be and I’ll try to post the correct answers.

 

Main Points Summary – Sam and Associates

Main Points Summary

The five main topics we covered in chapters 4 and 5 are:
1)    Adjustments
2)    Accounts Involved in Adjustments
3)    The Closing Process
4)    The Worksheet
5)    Classification Groups

Adjustments

Adjustments are done at the end of an accounting period to recognize internal transactions and bring asset and liability accounts to their proper balances after all transactions for an accounting period. It is based on the revenue recognition principle and the matching principle.

There are five different types of adjusting entries:
-Adjustments for Prepaid Expenses
-Adjustments for Amortization
-Adjustments for Unearned Revenues
-Adjustments for Accrued Expenses
-Adjustments for Accrued Revenues

Accounts Involved in Adjustments

Prepaid Expenses refers to the use of assets paid for in advance such as insurance or rent (debit expense, credit asset). Amortization adjustments are done to record the usage of a capital (long-term) assets life (debit expense, credit asset). Unearned Revenue is adjusted to recognize revenues earned (debit unearned revenue, credit revenue). Accrued Expenses are adjusted to recognize unrecorded and unpaid expenses (debit expense, credit liability). Lastly, Accrued Revenues are adjusted to recognize unrecorded and not yet received revenues (debit asset, credit revenue).

The Closing Process

After financial statements are completed, the closing process begins. The main function of the closing process is to ensure that the account is ready for the next fiscal period. The owner’s equity should reflect the revenue, expense and withdrawals accounts. In order to measure results from the period that has just ended, those accounts should begin with balances set at zero. Additionally, the increases that come from the net income should reflect the capital account of the owner. The decreases due to the net losses and withdrawals should also be shown in the owner’s capital account. Most accounts involved in the closing process are known as Temporary or Nominal Accounts, these accounts are the Revenue, Expense, Withdrawals and Income Summary accounts. These accounts are closed, with the balances brought to zero at the end of every fiscal period.

Process of closing:
-Close Revenue accounts into Income Summary (Debit = Revenue, Credit = Income Summary)
-Close Expense accounts into Income Summary (Debit = Income Summary, Credit = Income Summary)
-Close Income Summary account into Owner’s Capital account (Credits and Debits depend on Net Income / Net Loss)
-Close Withdrawals account into Owner’s Capital account (Debit = Capital, Credit = Drawings)

The Worksheet

The worksheet is used to to prepare for the creation of financial statements, such as the Income Statement, the Statement of Owner’s Equity, and the Balance Sheet. The worksheet contains five different sections for the Unadjusted Trial Balance, the Adjustments, the Adjusted Trial Balance, the Income Statement, and the Balance Sheet / Statement of Owners Equity. Every account can be listed onto the worksheet. Figures are all recorded into the Trial Balance sections before being moved over to their appropriate sections. Revenues and Expenses to the Income Statement section and Assets, Liabilities, and Owner’s Capital and Withdrawal into the Balance Sheet section. The Net Income / Loss also appears on the worksheet under the Income Statement and Balance Sheet sections.

Classification Groups

There are three major categories within a classified balance sheet; they are assets, liabilities, and owner’s equity. Within those three, there are multiple sub categories

Assets:
-Current assets (cash, accounts receivable), used within the fiscal period
-Long term investments (stocks, bonds, unused land), last more than one fiscal period
-Plants, property, and equipment (land, buildings, equipment), last more than one fiscal period
-Intangible assets (patents, grants, copyrights, trademarks, goodwill)

Liabilities:
-Current liabilities (accounts payable, notes payable, unearned revenue), paid within a fiscal period
-Long term liabilities (mortgage payable, bank loan), paid over multiple fiscal periods

Owners Equity:
-Capital

How does the unit relate to GAAPs?

In this unit we learn how to do adjustments. When adjusting we recognize the revenue recognition principle and the matching principle. We also learn that accrual basis accounting is founded on the revenue recognition principle, the matching principle and the time period principle.

How does the unit relate to identifying, recording, measuring, and communication information?

We identify what accounts are needed to do the adjustments for the accounting period and the accounts needed for the closing process. Then we record and measure the by using the general journal. Finally we communicate the information by posting post-closing trial balance, and classified balance sheets.

How do the topics covered ensure that accounting information is relevant, reliable, consistent, and comparable?

The GAAPS, which in this case are: matching principle, time period principle and revenue recognition principle ensure that the accounting information is relevant, reliable, consistent and comparable.

 

Homework

Go see the school musical – “The 25th Annual Putnam County Spelling Bee”

It is hilarious!

 

Adjusting Entries Review Questions Answers

The formatting didn’t transfer very well but you can still check the accounts and values.

4-7A

2001

a) Jan. 31 Amortization Expense, Equipment                                  6,000

Accumulated Amortization, Equipment 6,000

To record amortization; 72,000/3 yrs = 24,000/yr × 3/12 = 6,000.

b) 31 Unearned Consulting Fees 6,000

Consulting Fees Earned 6,000

To record fees earned.

c) 31 Rent Expense 30,000

Prepaid Rent 30,000

To record expired rent; 45,000 × 4/6 = 30,000.

d) 31 Wages Expense                         19,000

Wages Payable 19,000

To record accrued wages.

e) 31 Interest Expense 1,470

Interest Payable 1,470

To record accrued interest; 84,000 × 7% = 5,880 × 3/12 = 1,470.

f) 31 Accounts Receivable 9,500

Consulting Fees Earned 9,500

To record accrued fees.

g) 31 Insurance Expense 1,500

Prepaid Insurance 1,500

To record expired insurance; 2,700/18 months = 150/month × 10 months.

h) 31 Amortization Expense, Office Furniture                          900

Accumulated Amortization, Office Furniture                             900

To record amortization of office furniture.

i) Jan. 31 Accounts Receivable                                                       4,100

Repair Revenues Earned                                                4,100

To record accrued repair revenues.

j) 31 Store Supplies Expense                                                  4,300

Store Supplies Inventory                                                 4,300

To record store supplies used; 1,600 + 3,000 – 300 = 4,300.

 

Problem 4-14A (35 minutes) Part 1

2001

Dec. 31      Office Supplies Expense…………………        12,760

Office Supplies…………………………..                           12,760

To record the cost of supplies used during
the year; $3,000 + $12,400 – $2,640.

31      Insurance Expense…………………………        12,312

Prepaid Insurance……………………..                           12,312

To record the cost of insurance coverage
that expired during the year.

Cost per    No. of        2001

Policy      Month     Months      Cost

1            $660           12        $  7,920

2              363             9             3,267

3              225             5         1,125

Total                                         $12,312

31      Salaries Expense…………………………….          2,100

Salaries Payable………………………..                              2,100

To record accrued but unpaid wages.

31      Amortization Expense, Building……..        11,250

Accumulated Amortization, Building                                           11,250

To record amortization expense. Annual
amortization = ($855,000 – $45,000)/30 = $27,000;
amortization for five months = $27,000 × 5/12.

31      Rent Receivable……………………………….          2,400

Rent Earned……………………………….                              2,400

To record earned but unpaid rent.

31      Unearned Rent…………………………………          4,350

Rent Earned……………………………….                              4,350

To record the amount of rent earned; 2 × $2,175.

Jan.   6      Salaries Payable………………………            2,100

Salaries Expense……………………..            8,400

Cash……………………………………                               10,500

To record payment of accrued and current

salaries; 4 × $2,100 = 8,400.

15 Cash………………………………………….            4,800

Rent Receivable………………….                                 2,400

Rent Earned………………………..                                 2,400

To record past due rent for two months.

 

Homework – February 23rd

Textbook Questions:

• pg 168 #QS 4-8, QS 4-9
• pg 170 #4-7
• pg 171 #4-9, 4-10
• pg 174 #4-4A, 4-5A