Question

Question 2 [15 marks] Phoenix Photography Company experienced a sharp decrease in Net Income during the year 2016. Madea Perry, the owner of the company, anticipates a need for a Bank loan in the year 2017. Late in 2016, Perry instructed Reunion Mann, the accountant, and friend of his to record a R10, 000 sale of portraits to the Perry family even though the photos will not be shot until January 2017. Perry told Reunion not to make the following December 31 2016 adjusting entries Salaries owed to employees R 20000 Prepaid insurance that has expired 2000 Required: 1. Compute the overall effect of these transactions on the company’s reported income for 2016. Is the reported net income overstated or understated. 2. 2. Why did Madea take these actions? Are they ethical? Give your reason, identifying the parties that benefitted and those that were harmed by Madea’s actions. Use the ethical decision making model which factor (economic, legal or ethical) seems to be taking precedence? Identify the stakeholders and potential consequences to each. 3. 3) As a personal friend of Perry’s, what advice would you give to him?

Answer 1

Answers
	1	The effects of the transactions on reported income:
	(a)	Sales the Revenue overstated by	10000
	(b)	Salaries expense underreported by	20000
	.(c)	Insurance expenses underreported by	2000
		Overall effect:
		Income over reported by	32000	(10000+20000+2000)
	2	Made takes this action to get loan from the bank
		This is not ethical. Accounting ethics is part of business ethics
		Business must follow the Accounting Standards
		As per accounting principle Revenues should be matched with expenses
		in the given period to arrive at income for the period
		Stakeholders like lenders and shareholders are harmed by this actions
		In this case economic factor is taking precedence
	3	As a friend, I would advise him to follow ethical behavior
		And prepare accounts as per standards.
		He can give additional explanations to the stakeholders along with the Financial Statements