prepare adjusting entries this additional Information (.) the computer repair equipment and Office furniture has estimated useful life 5 years without residual value 2) Office Supplies on ( physical countP 3,000 3.) Unpaid salaries for the remaining One-half month of Dec 2015. 4. doubtful accounts is 5% of outstanding accounts receivable c. Unearned service income, & 12,000
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Answer:
Before beginning adjusting entry examples for Printing Plus, let’s consider some rules governing adjusting entries:
Every adjusting entry will have at least one income statement account and one balance sheet account.
Cash will never be in an adjusting entry.
The adjusting entry records the change in amount that occurred during the period.
What are “income statement” and “balance sheet” accounts? Income statement accounts include revenues and expenses. Balance sheet accounts are assets, liabilities, and stockholders’ equity accounts, since they appear on a balance sheet. The second rule tells us that cash can never be in an adjusting entry. This is true because paying or receiving cash triggers a journal entry. This means that every transaction with cash will be recorded at the time of the exchange. We will not get to the adjusting entries and have cash paid or received which has not already been recorded. If accountants find themselves in a situation where the cash account must be adjusted, the necessary adjustment to cash will be a correcting entry and not an adjusting entry.
With an adjusting entry, the amount of change occurring during the period is recorded. For example, if the supplies account had a $300 balance at the beginning of the month and $100 is still available in the supplies account at the end of the month, the company would record an adjusting entry for the $200 used during the month (300 – 100). Similarly for unearned revenues, the company would record how much of the revenue was earned during the period.
Let’s now consider new transaction information for Printing Plus.
Earnings Management
Recording adjusting entries seems so cut and dry. It looks like you just follow the rules and all of the numbers come out 100 percent correct on all financial statements. But in reality this is not always the case. Just the fact that you have to make estimates in some cases, such as depreciation estimating residual value and useful life, tells you that numbers will not be 100 percent correct unless the accountant has ESP. Some companies engage in something called earnings management, where they follow the rules of accounting mostly but they stretch the truth a little to make it look like they are more profitable. Some companies do this by recording revenue before they should. Others leave assets on the books instead of expensing them when they should to decrease total expenses and increase profit.
Take Mexico-based home-building company Desarrolladora Homex S.A.B. de C.V. This company reported revenue earned on more than 100,000 homes they had not even build yet. The SEC’s complaint states that Homex reported revenues from a project site where every planned home was said to have been “built and sold by Dec. 31, 2011. Satellite images of the project site on March 12, 2012, show it was still largely undeveloped and the vast majority of supposedly sold homes remained unbuilt.”1
Is managing your earnings illegal? In some situations it is just an unethical stretch of the truth easy enough to do because of the estimates made in adjusting entries. You can simply change your estimate and insist the new estimate is really better when maybe it is your way to improve the bottom line, for example, changing your annual depreciation expense calculated on expensive plant assets from assuming a ten-year useful life, a reasonable estimated expectation, to a twenty-year useful life, not so reasonable but you insist your company will be able to use these assets twenty years while knowing that is a slim possibility. Doubling the useful life will cause 50% of the depreciation expense you would have had. This will make a positive impact on net income. This method of earnings management would probably not be considered illegal but is definitely a breach of ethics. In other situations, companies manage their earnings in a way that the SEC believes is actual fraud and charges the company with the illegal activity.
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