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 ____________

Issue 6: Bring Your Daughters and Sons to Work Day Litigation

On Bring Your Daughters and Sons to Work Day at Winglo Corporation not only did Sandy Gilhaus, a Winglo employee, bring her ten-year-old daughter Sarah to work, but BCE also installed Winglos new computer system on that day. After installation, when Sandy attempted to adjust the monitor connected to her new computer, she inadvertently knocked the monitor off the desk and onto the floor. The screen shattered with a piece of the glass striking Sarahs right big toe. To make a long story short, Sarahs toe needed four stitches to stop the bleeding and Sandy has blamed the installer of the system for placing the monitor in a dangerous position near the back edge of her desk. The damages to this point have been minimal as Sandy drove Sarah to their HMO and paid the $20 copay for an office visit. Yet, the Gilhaus family has sued BCE for the following:

Likely future plastic surgery $ 5,000

Emotional distress to Sarah 500,000

Emotional distress to Sandy 1,200,000

Total $1,705,000

BCEs lawyers believe that this case, with the possible exception of the plastic surgery (for which the HMO wont pay), is frivolous. BCE has no insurance to cover this sort of liability. If this case goes to court, BCEs on staff attorneys will handle the case. To eliminate any possible bad press from this case, BCEs lawyers suggested settling for a nuisance value of $10,000. Sarahs family rejected this offer out of hand and asked for $200,000 to settle this out of court. BCE has decided, at least at this point, to refuse any further settlement offer.

In their lawyers letter to you BCEs lawyers indicated that they believe that BCE has just and meritorious defense available to fight this case. Furthermore, BCEs legal counsel for the case indicated that while she agrees that this case is largely frivolous, litigation involving a young child is somewhat of a crap shoot and that making a definite prediction on the outcome of the case is impossible. In the end she believes the judgment will likely be $5,000 for the plastic surgery. What entry or disclosure, if any, is necessary in this circumstance?