On February 20, 2022, you are well into the fieldwork of the 12/31/2021 audit and the following issues have arisen during the audit of Klamp Computer Company (KCC.)

1. Service revenue

2. Account receivable from officers

3. Prepaid advertising

4. Chelsea Company receivable

5. Inventory

6. Bring Your Daughters and Sons to Work Day litigation

Florence King the president of KCC wants you to present your position on each of these issues as she would like your judgment as to good GAAP numbers. But, she has also pointed out that she understands that GAAP often does not provide a precise answer, and in such cases, she would rather err 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 Florence.

Prepare a memo that summarizes relevant professional standards (standard and paragraph should be cited) related to each of the 6 issues and prepare 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). Prepare entries for all misstatements you identify, regardless of the amount involved. That is, dont simply say no entry is needed because any amount involved would be immaterial. Assume that the current income is $1,323,839. 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 (before taxes) of any entries that you propose on a schedule such as the following (make clear over and understatements of income) :

Income Effect

1. Unearned service revenue ____________

2. Account receivable from officers ____________

3. Prepaid advertising ____________

4. Chelsea Company receivable ____________

5. Inventory ____________

6. Bring your Daughters and Sons to Work Day litigation ____________