ACCT 615 MANAGEMENT ACCOUNTING LECTURE 02 DISCUSSION 1. BRIEF EXERCISE (ANALYZING TRANSACTIONS) The following transactions were carried out during the month of May by Hagen and Associates, a firm of design architects. For each of the five transactions, you are to state whether the transaction represented revenue to the firm during the month of May. Give reasons for your decision in each case. a) The firm received $300,000 cash by issuing additional shares of capital stock. b) Collected cash of $25,000 from an account receivable. The receivable originated in April from services rendered to a client. c) Borrowed $60,000 from Century Bank to be repaid in three months. d) Earned $250 interest on a company savings account during the month of May. No withdrawals were made from this account in May e) Completed plans for guesthouse, pool, and spa for a client. The $7,000 fee for this project was billed to the client in May, but will not be collected until June 25. 2. CRITICAL THINKING CASE (REVENUE RECOGNITION) Happy Trails, Inc., is a popular family resort just outside Yellowstone National Park. Summer is the resort's busy season, but guests typically pay a deposit at least six months in advance to guarantee their reservations. the resort is currently seeking new investment capital in order to expand operations. The more profitable Happy Trails appears to be, the more interest it will generate from potential investors. Ed Grimm, an accountant employed by the resort, has been asked by his boss to include $2 million of unearned guest deposits in the computation of income for the current year. Ed explained to his boss that because these deposits had not yet been earned they should be reported in the balance sheet as liabilities, not in the income statement as revenue. Ed argued that reporting guest deposits as revenue would inflate the current year's income and may mislead investors. Ed's boss then demanded that he include $2 million of unearned guest deposits in the computation of income or be fired. He then told Ed in an assuring tone, "Ed, you will never be held responsible for misleading potential investors because you are just following my orders." Instructions Should Ed Grimm be forced to knowingly overstate the resort's income in order to retain his job? Is Ed's boss correct in saying that Ed cannot be held responsible for misleading potential investors? Discuss