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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.

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