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 2: Accounts Receivable From Officers

At year-end BCE has $110,000 in accounts receivables from officers on the books. The Board of Directors approved these loans which are in the form of demand notes. One of the staff assistants asked whether there was any intent to require officers to pay back these loans. Linda Wilson and Jan Wiggs, who each owe 1/2 of the total amount outstanding, agreed that while not much thought had been given to it, they imagined that they might someday repay the loans. On the other hand, they thought that the Board of Directors might forgive the loans some year in lieu of their annual bonus.

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