KCN Accounting Issues Case

On February 20, 20X4 you are well into the field work of the audit and the following issues have arisen during the audit of Keystone Computers & Networks (KCN).

1. Unearned service revenue

Sam Best the president of KCN wants you to present your position on each of these issues. Recall that $70,000 is considered material for this audit. Also, any of the answers below can be zero. He wants you to arrive at a judgment as to "good GAAP" numbers and to make sure that the financial statements follow GAAP. But, he has also pointed out that he understands that GAAP often does not provide a precise answer, and in such cases, he 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 management. Bearing both this and the requirements that GAAP be followed, determine appropriate amounts for any adjustments.

A memo that summarizes relevant professional standards (standard and paragraph should be cited) related to each of the 6 issues and do any proposed journal entries. Discuss information that would be included in any note disclosures related to each of the six items (you need not draft formal note disclosures). When preparing entries assume they are all material at this point. That is, don't simply say no entry is needed because any amount involved would be immaterial. Assume that the current income is $458,437. 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 of any entries that you propose on a schedule such as the following:

Income effect

1. Unearned service revenue____________

Discuss whether your adjustments are material. Assume that Best has reviewed your suggestions whether any proposed adjustments are material, and whether omission of any note disclosures would result in a significant departure from GAAP.

For purposes of your spreadsheet all journal entries are to be posted regardless of materiality.

Discuss whether your adjustments are material. Assume that Best has reviewed your suggestions whether any proposed adjustments are material, and whether omission of any note disclosures would result in a significant departure from GAAP.

For purposes of your spreadsheet all journal entries are to be posted regardless of materiality.

Discuss whether your adjustments are material. Assume that Best has reviewed your suggestions whether any proposed adjustments are material, and whether omission of any note disclosures would result in a significant departure from GAAP.

Issue 4: Unearned Service Revenue

The unearned service revenue of $22,100 is the result of a number of one year service policies sold late in December as an "experiment." The policies are sold at an average of $900 per year per customer; the $22,100 represents the total cash received as of year-end. The $900 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 KCN 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, KCN has limited the number of policies available due to difficulties in calculating the costs associated with such policies.KCN estimates that while the number service calls is likely to increase (the guess is from 1.7 to 3 or 4 per year), the cost is likely to decrease to around $100 per call.

Since these policies were sold so late in the year, no income need be recognized at this point. Yet, KCN has made no entry to record expected expenses related to this revenue.

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

Summarize the facts of the assigned issue.

Using access to the codification, locate the relevant FASB ASC. Include a summary and how it is relevant to your issue.

the question provided in your assigned issue Provide and explain any journal entries proposed or any reasons journal entries may not be proposed. Also, discuss if other disclosure may be appropriate. Fully explain your reasoning.

For purposes of your spreadsheet all journal entries are to be posted regardless of materiality.