Question

Please explain and answer the following Question below (C3-82 page 197 of the 12th edition of the financial accounting text.  

The net income of Summit Photography Company decreased sharply during 2018. Anette Summit, the owner of the company, anticipates the need for a bank loan in late 2019. Late in 2018, Summit instructed Tim Loftus, the company's controller to record a $15,000 sale of portraits to the Summit family, even though the photos will not be shot until January 2019. Summit also told Loftus not to make the following December 31, 2018 adjusting entries. Salaries owed to employees for $14,000, and prepaid insurance that has expired for $2,000.

Requirements

1. Calculate the overall effect of these transactions on the company's reported income for 2018. Is reported net income overstated or understated.

2. Why did Summit take these actions? Are they ethical? Give your reason, identifying the parties helped and the parties harmed by Summit's actions. Consult the Decision Framework for making ethical judgments in Chapter 1. Which factor (economic, legal, or ethical) seems to be taking precedence? Identify stakeholders and the potential consequences to each.

3. What advice would you give to Loftus?

Thank you

Answer 1

Overall effect of these transactions on the company's reported income for 2018:

Increase in Income for recording sale of portrait	$15,000
Increase in Income for not recording salaries expenses	$14,000
Increase in Income for not recording insurance expenses	$2,000
Total Effect on reported income	$31,000	(INCREASE)

Summit took this action to show a better reported income to get the Bank Loan

These actions are not ethical.

Parties helped: Anette Summit

Parties harmed: Bank, shareholders of bank

Loftus should advice Anette Summit that these actions are unethical and there are ethical standard for Accountants which does not permit him to do what is advised