Question
Nazir Khan, the CEO of Peshawar Inc., signed an employment contract with the company that allowed him to earn a bonus if he increased Peshawars
Nazir Khan, the CEO of Peshawar Inc., signed an employment contract with the company that allowed him to earn a bonus if he increased Peshawars gross profit margin by more than 3%. The draft statement of income for 2021 has just been prepared and is shown below.
2021 | 2020 | ||
Sales | $113,000 | $80,000 | |
Cost of goods sold | 62,000 | 48,000 | |
Gross profit | 51,000 | 32,000 | |
Operating expenses | 21,000 | 8,000 | |
Income from operations | 30,000 | 24,000 | |
Income tax expense | 9,000 | 7,200 | |
Net income | $21,000 | $16,800 | |
Gross profit margin | 45.1% | 40.0% |
The board of directors is about to meet and determine if Nazir is to be awarded his bonus. As one of the board members, you are surprised to receive an anonymous letter supposedly from a member of the accounting department that indicates that the CEO asked the staff member to do the following during 2021:
1. Record purchase returns of $7,000 as an increase in sales revenue.
2. Record freight of $5,000 paid on purchases of merchandise as an operating expense.
3. Include the $6,000 refund liability as sales revenue because the refunds might not take place.
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started