The net income of Steinbach & Sons, a department store, decreased sharply during 2014. Mort Steinbach, manager of the store, anticipates the need for a bank loan in 2015. Late in 2014, Steinbach instructs the store’s accountant to record a $2,000 sale of furniture to the Steinbach family, even though the goods will not be shipped from the manufacturer until January 2015. Steinbach also tells the accountant not to make the following December 31, 2014, adjusting entries:
Salaries owed to employees..................................................... $900
Prepaid insurance that has expired.......................................... 400
Requirements
1. Compute the overall effects of these transactions on the store’s reported income for 2014.
2. Why is Steinbach taking this action? Is his action ethical? Give your reason, identifying the parties helped and the parties harmed by Steinbach’s action. (Challenge)
3. As a personal friend, what advice would you give the accountant? (Challenge)