Morgan is a building contractor on the Gulf Coast. After losing a number of big lawsuits, it was facing its first annual net loss as the end of the year approached. The owner, Heather Thomas, was under intense pressure from the companys creditors to report positive net income for the year. However, she knew that the controller, Andy, had arranged a short-term bank loan of $10,000 to cover a temporary shortfall of cash. She told Andy to record the incoming cash as construction revenue instead of a loan. That would nudge the companys income into postivie territory for the year, and then, she said, the entry could be corrected in January when the loan was repaid.

1. If the fraudulent entry is recorded, does the accounting equation still equal? How are the assets, liabilities and equity impactedwhich are impacted and if so, are they overstated (too high) or understated (too low)?

2. Of the four financial statements, which are impacted by the fraud and where in the statement? Be specific and provide sufficient detail to support your answer.