The following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud.

 

Rite Aid also improperly accounted for certain vendor rebates. On the last day of FY 1999, Rite Aid recorded reductions to accounts payable and cost of goods sold totaling $42 million. The reductions were based upon expected credits from two vendors which in fact were expressly contingent
upon Rite Aid's future sales of these vendors' products. At Bergonzi's direction, Rite Aid reopened its books to record an additional $33 million of credits on March 11, 1999, subsequent to the close of the fiscal year, when it was readily apparent that the Company's results would fall short of Wall Street analysts' projections. These entries violated GAAP because the credits were unearned at the time Rite Aid recorded them, in FY 1999. Moreover, the purchasing agreements pursuant to which Rite Aid might have earned these credits in the future were not consummated in legally
binding form as of that time. The $75 million in income recognized from these rebates represented 37% of Rite Aid's pre-tax income for FY 1999.

 

 Rite Aid was obligated to pass through a portion of any vendor rebates it received to third-party employers that used Rite Aid as their
 pharmaceutical benefits manager to dispense drugs to their employees. Thus, even if Rite Aid had been justified in recognizing the vendor credits
 immediately, Rite Aid could have kept only $33 million for itself. The remaining $42 million in vendor rebates would have been recorded as a
 payable to third-party employers under Rite Aid's pass-through obligation and not as income.

 

 Representatives of the vendors informed Grass that any amounts payable under the agreements represented rebates owed only if Rite Aid dispensed sufficient quantities of the vendors' products so as to maintain market share. None of the credits were to be paid up front and all amounts were to be earned in the future. Grass signed or initialed letters of intent with two vendors on the last business day of the fiscal year (February 26, 1999). The letters expressly referred to contingencies that had to occur before the deals between Rite Aid and the vendors could be final. These letters of intent were shown to Bergonzi in Brown's presence.