On February 20, 20X4 you are well into the field work of the 12/31/20X3 audit and the following issues have arisen during the audit of Beta Computer Equipment Company (BCE.)

1. Service revenue

2. Account receivable from officers

3. Prepaid advertising

4. Alan Almond Company receivable

5. Inventory

6. Bring Your Daughters and Sons to Work Day litigation

Linda Wilson the president of BCE 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 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 Linda.

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. Alan Almond Company receivable ____________

5. Inventory ____________

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

BCE has included service revenue of $22,100 as a result of a number of one year service policies sold late in December as an experiment. These service policies became effective on January 1, 20X4, or shortly thereafter.

The policies are sold at an average of $600 per year per customer; the $22,100 represents the total cash received as of year-end (debit cash, credit service revenue). The $600 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 BCE 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, BCE has restricted the number of policies available due to difficulties in calculating the costs associated with such policies. BCE estimates that the number service calls is likely to increase to about 4 per year; the cost is expected to decrease to around $150 per call. So, at this point, the program is projected to break even. The aggressive pricing of the service policies is due to (1) the experimental nature of the program and (2) a desire to maintain long-term customer loyalty for future purchases of equipment.

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