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 3: Prepaid Advertising

On November 1, 20X3 BCE paid $30,000 in advance for eight months of advertising on radio station KNEWZ, a local news station. The entry was recorded with a debit to prepaid advertising and a credit to cash. At December 31, 20X3 BCE expensed $7,500 (debit to advertising expense and credit to prepaid advertising for 2 of the 8 months). Earlier, on December 29, 20X3 BCE received a letter from KNEWZ indicating that the radio station was changing its format on January 1, 20X4 to classic heavy metal. In brief, news is being replaced by old songs of Phish, Ozzie Osbourne, and Metallica. It will now use the call letters KDEV.

Although BCE has no real data on this, it is managements impression that most Ozzie Osbourne fans buy fewer networked computer systems than news station listeners. Accordingly, management attempted to cancel the agreement and receive a refund. Regrettably, the contract for the advertising provides no assurances about a change in station format and BCEs lawyers say that obtaining any recovery in a court proceeding is doubtful. KDEV has refused any attempts at renegotiation and has suggested that BCE might be surprised at the number of customers that might respond to the commercials. KDEV is even willing to work with BCE to redo commercials eliminating the old ones that used the sappy sounding news announcers and replacing them with commercials using their new announcers; KDEV is willing to record these commercials for no additional cost. BCE management still questions whether the advertising will be well placed, but does believe that there may be a few listeners who might respond to the advertisement. BCE legal counsel suggests that it is not worth pursuing this matter further.

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