3-1 CHAPTER 3 Adjusting the Accounts ASSIGNMENT CLASSIFICATION TABLE Study Objectives Questions Brief Exercises Exercises A Problems B Problems *1. Explain the time period assumption. 1 1 *2. Explain the accrual basis of accounting. 2, 3, 4, 5 2, 3, 10 *3. Explain the reasons for adjusting entries. 6, 7 1 *4. Identify the major types of adjusting entries. 8, 18 2, 8 4, 6, 11 *5. Prepare adjusting entries for deferrals. 8, 9, 10, 11, 12, 13, 18, 19, 20 3, 4, 5, 6 5, 6, 7, 8, 9, 10, 11, 12, 13, 15 1A, 2A, 3A, 4A, 5A, 6A 1B, 2B, 3B, 4B, 5B *6. Prepare adjusting entries for accruals. 8, 14, 15, 16, 17, 18, 19, 20 7 5, 6, 7, 8, 9, 10, 11, 12, 13, 15 1A, 2A, 3A, 4A, 5A, 6A 1B, 2B, 3B, 4B, 5B *7. Describe the nature and purpose of an adjusted trial balance. 21 9, 10 10, 11, 12, 13, 14 1A, 2A, 3A, 5A, 6A 1B, 2B, 3B, 5B *8. Prepare adjusting entries for the alternative treatment of deferrals. 22 11 16, 17 6A *Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendix to the chapter.
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3-1
CHAPTER 3
Adjusting the Accounts
ASSIGNMENT CLASSIFICATION TABLE
Study Objectives QuestionsBrief
Exercises ExercisesA
ProblemsB
Problems
*1. Explain the time periodassumption.
1 1
*2. Explain the accrual basisof accounting.
2, 3, 4, 5 2, 3, 10
*3. Explain the reasons foradjusting entries.
6, 7 1
*4. Identify the major typesof adjusting entries.
8, 18 2, 8 4, 6, 11
*5. Prepare adjusting entriesfor deferrals.
8, 9, 10,11, 12, 13,18, 19, 20
3, 4, 5, 6 5, 6, 7, 8,9, 10, 11,12, 13, 15
1A, 2A, 3A,4A, 5A, 6A
1B, 2B, 3B,4B, 5B
*6. Prepare adjusting entriesfor accruals.
8, 14, 15,16, 17, 18,19, 20
7 5, 6, 7, 8,9, 10, 11,12, 13, 15
1A, 2A, 3A,4A, 5A, 6A
1B, 2B, 3B,4B, 5B
*7. Describe the nature andpurpose of an adjustedtrial balance.
21 9, 10 10, 11, 12,13, 14
1A, 2A, 3A,5A, 6A
1B, 2B, 3B,5B
*8. Prepare adjustingentries for the alternativetreatment of deferrals.
22 11 16, 17 6A
*Note: All asterisked Questions, Exercises, and Problems relate to material contained in the appendixto the chapter.
3-2
ASSIGNMENT CHARACTERISTICS TABLE
ProblemNumber Description
DifficultyLevel
TimeAllotted (min.)
1A Prepare adjusting entries, post to ledger accounts,and prepare an adjusted trial balance.
Simple 40–50
2A Prepare adjusting entries, post, and prepare adjustedtrial balance and financial statements.
Simple 50–60
3A Prepare adjusting entries and financial statements. Moderate 40–50
4A Prepare adjusting entries. Moderate 30–40
5A Journalize transactions and follow through accountingcycle to preparation of financial statements.
1B Prepare adjusting entries, post to ledger accounts,and prepare an adjusted trial balance.
Simple 40–50
2B Prepare adjusting entries, post, and prepare adjustedtrial balance and financial statements.
Simple 50–60
3B Prepare adjusting entries and financial statements. Moderate 40–50
4B Prepare adjusting entries. Moderate 30–40
5B Journalize transactions and follow through accountingcycle to preparation of financial statements.
Moderate 60–70
BLOOM’S TAXONOMY TABLE
3-3
Co
rrel
atio
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har
t b
etw
een
Blo
om
’s T
axo
no
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Stu
dy
Ob
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ives
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Ch
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xerc
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an
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rob
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Stu
dy
Ob
ject
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Kn
ow
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Co
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Ap
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nal
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Syn
thes
isE
valu
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*1.
Exp
lain
th
e ti
me
per
iod
ass
um
pti
on
.Q
3-1
E3-
1
*2.
Exp
lain
th
e ac
cru
al b
asis
of
acco
un
tin
g.
Q3-
2Q
3-3
Q3-
4Q
3-5
E3-
3E
3-10
E3-
2
*3.
Exp
lain
th
e re
aso
ns
for
adju
stin
g e
ntr
ies.
Q3-
6Q
3-7
BE
3-1
*4.
Iden
tify
th
e m
ajo
r ty
pes
of
adju
stin
g e
ntr
ies.
Q3-
8Q
3-18
BE
3-2
BE
3-8
E3-
4E
3-6
E3-
11
*5.
Pre
par
e ad
just
ing
en
trie
s fo
r d
efer
rals
.Q
3-8
Q3-
9Q
3-10
Q3-
11Q
3-12
Q3-
13Q
3-19
Q3-
20
Q3-
18B
E3-
3B
E3-
4B
E3-
5B
E3-
6E
3-5
E3-
6E
3-7
E3-
8
E3-
9E
3-10
E3-
11E
3-12
E3-
13E
3-15
P3-
1AP
3-2A
P3-
3A
P3-
4AP
3-5A
P3-
6AP
3-1B
P3-
2BP
3-3B
P3-
4BP
3-5B
E3-
15
*6.
Pre
par
e ad
just
ing
en
trie
s fo
r ac
cru
als.
Q3-
8Q
3-14
Q3-
15Q
3-19
Q3-
20
Q3-
17Q
3-16
Q3-
18B
E3-
7E
3-5
E3-
6E
3-7
E3-
8E
3-9
E3-
10E
3-11
E3-
12E
3-13
E3-
15P
3-1A
P3-
2AP
3-3A
P3-
4AP
3-5A
P3-
6AP
3-1B
P3-
2BP
3-3B
P3-
4BP
3-5B
E3-
15
*7.
Des
crib
e th
e n
atu
re a
nd
pu
rpo
se o
f an
adju
sted
tri
al b
alan
ce.
Q3-
21B
E3-
9B
E3-
10E
3-14
E3-
10E
3-11
E3-
12E
3-13
P3-
1A
P3-
2AP
3-3A
P3-
5AP
3-6A
P3-
1B
P3-
2BP
3-3B
P3-
5B
*8.
Pre
par
e ad
just
ing
en
trie
s fo
r th
e al
tern
ativ
etr
eatm
ent
of
def
erra
ls.
Q3-
22B
E3-
11E
3-16
E3-
17P
3-6A
Bro
aden
ing
Yo
ur
Per
spec
tive
Co
mm
un
icat
ion
Fin
anci
al R
epo
rtin
gC
om
par
ativ
e A
nal
ysis
Exp
lori
ng
th
e W
eb
Dec
isio
n M
akin
g A
cro
ss t
he
Org
aniz
atio
n
All
Ab
ou
t Y
ou
Eth
ics
Cas
e
3-4
ANSWERS TO QUESTIONS
1. (a) Under the time period assumption, an accountant is required to determine the relevance ofeach business transaction to specific accounting periods.
(b) An accounting time period of one year in length is referred to as a fiscal year. A fiscal yearthat extends from January 1 to December 31 is referred to as a calendar year. Accountingperiods of less than one year are called interim periods.
2. The two generally accepted accounting principles that relate to adjusting the accounts are:The revenue recognition principle, which states that revenue should be recognized in the accountingperiod in which it is earned.The matching principle, which states that efforts (expenses) be matched with accomplishments(revenues).
3. The law firm should recognize the revenue in April. The revenue recognition principle states thatrevenue should be recognized in the accounting period in which it is earned.
4. Information presented on an accrual basis is more useful than on a cash basis because it revealsrelationships that are likely to be important in predicting future results. To illustrate, under accrualaccounting, revenues are recognized when earned so they can be related to the economicenvironment in which they occur. Trends in revenues are thus more meaningful.
5. Expenses of $4,500 should be deducted from the revenues in April. Under the matching principleefforts (expenses) should be matched with accomplishments (revenues).
6. No, adjusting entries are required by the revenue recognition and matching principles.
7. A trial balance may not contain up-to-date information for financial statements because:(1) Some events are not journalized daily because it is not efficient to do so.(2) The expiration of some costs occurs with the passage of time rather than as a result of daily
transactions.(3) Some items may be unrecorded because the transaction data are not known.
8. The two categories of adjusting entries are deferrals and accruals. Deferrals consist of prepaidexpenses and unearned revenues. Accruals consist of accrued revenues and accrued expenses.
9. In the adjusting entry for a prepaid expense, an expense is debited and an asset is credited.
10. No. Depreciation is the process of allocating the cost of an asset to expense over its useful life ina rational and systematic manner. Depreciation results in the presentation of the book value ofthe asset, not its market value.
11. Depreciation expense is an expense account whose normal balance is a debit. This accountshows the cost that has expired during the current accounting period. Accumulated depreciationis a contra asset account whose normal balance is a credit. The balance in this account is thedepreciation that has been recognized from the date of acquisition to the balance sheet date.
*13. In the adjusting entry for an unearned revenue, a liability is debited and a revenue is credited.
*14. Asset and revenue. An asset would be debited and a revenue would be credited.
*15. An expense is debited and a liability is credited.
*16. Net income was understated $200 because prior to adjustment, revenues are understated by$900 and expenses are understated by $700. The difference in this case is $200 ($900 – $700).
*17. The entry is:Jan. 9 Salaries Payable ......................................................................................... 2,000
*19. (a) Salaries Payable. (d) Supplies Expense.(b) Accumulated Depreciation. (e) Service Revenue.(c) Interest Expense. (f) Service Revenue.
*20. Disagree. An adjusting entry affects only one balance sheet account and one income statementaccount.
*21. Financial statements can be prepared from an adjusted trial balance because the balances of allaccounts have been adjusted to show the effects of all financial events that have occurredduring the accounting period.
*22. For Supplies Expense (prepaid expense): expenses are overstated and assets are understated.The adjusting entry is:
Assets (Supplies)...................................................................................................... XXExpenses (Supplies Expense)........................................................................ XX
For Rent Revenue (unearned revenues): revenues are overstated and liabilities are understated.The adjusting entry is:
Revenues (Rent Revenue) ..................................................................................... XXLiabilities (Unearned Rent Revenue) ............................................................ XX
3-6
SOLUTIONS TO BRIEF EXERCISES
BRIEF EXERCISE 3-1
(a) Prepaid Insurance—to recognize insurance expired during the period.
(b) Depreciation Expense—to account for the depreciation that has occurredon the asset during the period.
(c) Unearned Revenue—to record revenue earned for services provided.
(d) Interest Payable—to recognize interest accrued but unpaid on notespayable.
Total expenses....................................................... 24,800Net income ................................................................................ $10,600
3-9
BRIEF EXERCISE 3-10
HARMONY COMPANYOwner’s Equity Statement
For the Year Ended December 31, 2008 Capital, January 1.......................................................................................... $15,600Add: Net income........................................................................................... 10,600
26,200Less: Drawings ............................................................................................. 6,000Capital, December 31 ................................................................................... $20,200
(b) 30 Service Revenue................................................... 3,000Unearned Service Revenue...................... 3,000
3-10
SOLUTIONS TO EXERCISES
EXERCISE 3-1
1. True.
2. True.
3. False. Many business transactions affect more than one of these artificialtime periods. For example, the purchase of a building affects expensesfor many years.
4. True.
5. False. A time period that lasts less than one year, such as monthly orquarterly periods, is called an interim period.
6. False. All calendar years are fiscal years, but not all fiscal years arecalendar years. An accounting time period that is one year in length isreferred to as a fiscal year. A fiscal year that starts on January 1 andends on December 31 is a calendar year.
EXERCISE 3-2
(a) Accrual-basis accounting records the transactions that change acompany’s financial statements in the periods in which the eventsoccur rather than in the periods in which the company receives or payscash. Information presented on an accrual basis is useful because itreveals relationships that are likely to be important in predicting futureresults. Conversely, under cash-basis accounting, revenue is recordedonly when cash is received, and an expense is recognized only whencash is paid. As a result, the cash basis of accounting often leads tomisleading financial statements.
(b) Politicians might desire a cash-basis accounting system over an accrual-basis system because if an accrual-accounting system is used, it couldmean that billions in government liabilities presently unrecorded wouldhave to be reported in the federal budget immediately. The recognitionof these additional liabilities would make the deficit even worse. Thisis not what politicians would like to see and be held responsible for.
3-11
(c) Dear Senator,
It is my understanding, after having taken a beginning course in account-ing principles, that the Federal government uses a cash-basis systemrather than an accrual-basis accounting system.
I am shocked at such a practice! There must be billions of dollars ofliabilities hidden in many contracts that have not been recorded yet forthe mere reason that they haven’t been paid yet. I realize that thedeficit would dramatically increase if we were to implement an accrualsystem, but in all fairness, we citizens should be given a more accuratepicture of what our government is up to.
Sincerely,
CONCERNED STUDENT
EXERCISE 3-3
(a) Cash received from revenue................................................... $100,000Cash paid for expenses............................................................ (70,000)
Cash-basis net income................................................... $ 30,000
(b) Total premium = $4,800 Total premium = Monthly premium X 12;$400 X 12 = $4,800
Purchase date = Aug. 1, 2007 Purchase date: On Jan. 31, there are6 months’ coverage remaining ($400 X 6).Thus, the purchase date was 6 monthsearlier on Aug. 1, 2007.
Total expenses .......................................................... 37,100Net income.................................................................................... $ 9,800
3-18
EXERCISE 3-14 (Continued)
GARCIA COMPANYOwner’s Equity Statement
For the Year Ended August 31, 2008 Capital, September 1, 2007 ........................................................................ $15,600Add: Net income ......................................................................................... 9,800Capital, August 31, 2008............................................................................. $25,400
Total liabilities.............................................................................. 7,500Owner’s equity
T. Garcia, Capital.................................................................................. 25,400Total liabilities and owner’s equity ....................................... $32,900
Total expenses.............................................. 71,000Net income ....................................................................... $ 14,100
NEOSHO RIVER RESORTOwner’s Equity Statement
For the Three Months Ended August 31, 2008 P. Harder, Capital, June 1................................................................ $ 0Investment by owner ........................................................................ 100,000Add: Net income................................................................................ 14,100
114,100Less: Drawings.................................................................................. 5,000P. Harder, Capital, August 31......................................................... $109,100
Total liabilities.......................................... 90,800Owner’s equity
P. Harder, Capital............................................. 109,100Total liabilities and owner’s equity...................................................... $199,900
Total expenses.................................................. 26,250Net income ........................................................................... $36,450
For the Year Ended December 31, 2008 J. Fernetti, Capital, January 1........................................................... $25,500Add: Net income................................................................................. 36,450
61,950Less: Drawing....................................................................................... 12,000J. Fernetti, Capital, December 31 .................................................... $49,950
Total liabilities................................................ 17,050Owner’s equity
J. Fernetti, Capital ................................................. 49,950Total liabilities and owner’s equity............................................................ $67,000
3-36
PROBLEM 3-3A (Continued)
(c) (1) I = P X R X T$150 = $5,000 X R X 1/2$150 = $2,500R
$150R =$2,500
R = 6%
(2) Salaries Expense, $11,300 less Salaries Payable 12/31/08, $1,300 =$10,000. Total payments, $12,500 – $10,000 = $2,500 SalariesPayable 12/31/07.
3-37
PROBLEM 3-4A
1. Dec. 31 Salaries Expense............................................. 2,320Salaries Payable ..................................... 2,320 [5 X $800 X 2/5 = $1,600 [3 X $600 X 2/5 = 720
$2,320]
2. 31 Unearned Rent.................................................. 74,000Rent Revenue .......................................... 74,000 [5 X $4,000 X 2 = $40,000) (4 X $8,500 X 1 = 34,000) $74,000]
Total expenses ................................................... 5,150Net income............................................................................. $1,200
RAND EQUIPMENT REPAIROwner’s Equity Statement
For the Month Ended September 30, 2008 J. Rand, Capital, September 1.......................................................... $18,600Add: Net income................................................................................. 1,200J. Rand, Capital, September 30........................................................ $19,800
Total liabilities..................................................................... 4,100Owner’s equity
J. Rand, Capital............................................................................ 19,800Total liabilities and owner’s equity .............................. $23,900
3-45
*PROBLEM 3-6A
(a) 1. June 30 Supplies ......................................................... 1,300Supplies Expense.............................. 1,300
2. 30 Interest Expense ......................................... 750 ($20,000 X 9% X 5/12)
Total expenses .............................................. 39,850Net income........................................................................ $18,750
GIVENS GRAPHICS COMPANYOwner’s Equity Statement
For the Six Months Ended June 30, 2008 Sue Givens, Capital, January 1........................................................ $ 0Investment by owner........................................................................... 22,000Add: Net income.................................................................................. 18,750Sue Givens, Capital, June 30............................................................ $40,750
Total expenses ............................................... 7,850Net income......................................................................... $ 3,850
ELSTON MOTELOwner’s Equity Statement
For the Month Ended May 31, 2008 Mary Lerner, Capital, May 1............................................................... $ 0Investment by owner........................................................................... 55,000Add: Net income................................................................................. 3,850Mary Lerner, Capital, May 31 ............................................................ $58,850
Total expenses .................................................... 12,210Net income.............................................................................. $ 3,090
3-62
PROBLEM 3-3B (Continued)
ORTEGA CO.Owner’s Equity Statement
For the Quarter Ended September 30, 2008 Jose Ortega, Capital, July 1, 2008.................................................. $ 0Investment by owner .......................................................................... 14,000Add: Net income ................................................................................ 3,090
17,090Less: Drawings.................................................................................... 600Jose Ortega, Capital, September 30, 2008................................... $16,490
Total liabilities............................................... $ 7,660Owner’s equity
Jose Ortega, Capital............................................. 16,490Total liabilities and owner’s equity ........ $24,150
(c) Interest of 12% per year equals a monthly rate of 1%; monthly interestis $50 ($5,000 X 1%). Since total interest expense is $50, the note hasbeen outstanding one month.
Total expenses ............................................... 4,800Net loss ............................................................................... $(1,850)
RONDELI EQUIPMENT REPAIROwner’s Equity Statement
For the Month Ended November 30, 2008 P. Rondeli, Capital, November 1...................................................... $12,800Less: Net loss...................................................................................... 1,850P. Rondeli, Capital, November 30.................................................... $10,950
Total liabilities..................................................................... 4,400Owner’s equity
P. Rondeli, Capital ...................................................................... 10,950Total liabilities and owner’s equity .............................. $15,350
3-71
BYP 3-1 FINANCIAL REPORTING PROBLEM
(a) Items that may result in adjusting entries for prepayments are:
1. Prepaid expenses and other current assets (per balance sheet).
2. Property, plant, and equipment, net of depreciation (per balancesheet).
3. Amortizable intangibles assets, net (per balance sheet)—amortizationis similar to depreciation (explained later in Chapter 10).
(b) Accrual adjusting entries were probably made for accounts payableand other current liabilities, interest expense, and income taxes payable.
(c) As indicated in the 5-Year Summary, the trend in net income has beenpositive. In every year since 2001 (except 2005), net income has increased.In 2001 net income was $2,400 million and in 2005 it was $4,078 million.
3-72
BYP 3-2 COMPARATIVE ANALYSIS PROBLEM
PepsiCo Coca-Cola
(a) Net increase (decrease) inproperty, plant, and equipmentfrom 2004 to 2005.
$ 532,000,000 ($ 305,000,000)
(b) Increase (decrease) in selling,general, and administrativeexpenses from 2004 to 2005.
$1,283,000,000 $ 849,000,000
(c) Increase (decrease) in long-term debt (obligations) from2004 to 2005.
($ 84,000,000) ($ 3,000,000)
(d) Increase (decrease) in netincome from 2004 to 2005.
($ 134,000,000) $ 25,000,000
(e) Increase (decrease) in cashand cash equivalents from2004 to 2005.
($ 436,000,000 ($2,006,000,000)
3-73
BYP 3-3 EXPLORING THE WEB
(a) The categories are:
1. The Big 4 10. Edgar2. Professional 11. FASB3. Associations 12. International4. Education 13. Publishers5. Finance 14. Journals and Publications6. Professors 15. Softwares7. Taxation 16. Other sites8. Audit and Law 17. Entertainment9. Government 18. Interest books
(b) Student answers will vary depending on the category selected.
Total expenses.............................................. 48,450Net income ....................................................................... $26,550
(b) The generally accepted accounting principles pertaining to the incomestatement that were not recognized by Amaya were the revenue recognitionprinciple and the matching principle. The revenue recognition principlestates that revenue is recognized when it is earned. The fees of$15,000 for summer rentals have not been earned and, therefore,should not be reported in income for the quarter ended March 31. Thematching principle dictates that efforts (expenses) be matched withaccomplishments (revenues) whenever it is reasonable and practicableto do so. This means that the expenses should include amounts incurredin March but not paid until April. The difference in expenses was$7,750 ($48,450 – $40,700). The overstatement of revenues ($15,000)plus the understatement of expenses ($7,750) equals the difference inreported income of $22,750 ($49,300 – $26,550).
3-75
BYP 3-5 COMMUNICATION ACTIVITY
Dear President Nickels:
Upon reviewing the accounts of your company at the end of the year,I discovered that adjusting entries were not made.
Adjusting entries are made at the end of the accounting period to ensurethat the revenue recognition and matching principles required undergenerally accepted accounting principles are followed. The use of adjustingentries makes it possible to report on the balance sheet the appropriateassets, liabilities, and owner’s equity at the statement date and to report onthe income statement the proper net income (or loss) for the year.
Adjusting entries are needed because the trial balance may not contain anup-to-date and complete record of transactions and events for the followingreasons:
1. Some events are not journalized daily because it is not efficient todo so. Examples are the use of supplies and the earning of wagesby employees.
2. The expiration of some costs is not journalized during the account-ing period because these costs expire with the passage of timerather than as a result of recurring daily transactions. Examplesof such costs are building and equipment depreciation, rent, andinsurance.
3. Some expenses, such as the cost of utility service and propertytaxes, may be unrecorded because the bills for the costs have notbeen received.
There are four types of adjusting entries:
1. Prepaid expenses—expenses paid in cash and recorded as assetsbefore they are used or consumed.
2. Unearned revenues—revenues received in cash and recorded asliabilities before they are earned.
3-76
BYP 3-5 (Continued)
3. Accrued revenues—revenues earned but not yet received in cashor recorded.
4. Accrued expenses—expenses incurred but not yet paid in cash orrecorded.
I will be happy to answer any questions you may have on adjusting entries.
Signature
3-77
BYP 3-6 ETHICS CASE
(a) The stakeholders in this situation are:
���� Cathi Bell, controller.���� The president of Bluestem Company.���� Bluestem Company stockholders.
(b) 1. It is unethical for the president to place pressure on Cathi to misstatenet income by requesting her to prepare incorrect adjusting entries.
2. It is customary for adjusting entries to be dated as of the balancesheet date although the entries are prepared at a later date. Cathidid nothing unethical by dating the adjusting entries December 31.
(c) Cathi can accrue revenues and defer expenses through the preparationof adjusting entries and be ethical so long as the entries reflecteconomic reality. Intentionally misrepresenting the company’s financialcondition and its results of operations is unethical (it is also illegal).
3-78
BYP 3-7 ALL ABOUT YOU ACTIVITY
We address the issue of contingent liabilities with greater precision inChapter 11. Our primary interest in this exercise is to engage students in adiscussion regarding the general nature of the financial statement elements(assets, liabilities, equity, revenues and expenses).
(a) By taking out the bank loan your friend has incurred a liability. You donot have a liability unless your friend defaults, or unless it becomesclear that he will default. The loan application may, however, require youto disclose any guarantees that you have signed, since they representpotential liabilities.
(b) Accounting standards have specific requirements regarding account-ing for situations where there is uncertainty regarding whether a liabilityhas been incurred. Those standards require an evaluation of the pro-bability of an amount being owed. Without going into detail regardingthose standards, the basic idea is that if it is probable that you willowe money, then you should accrue a liability. If it is not probable, butit is possible that you will owe money, then you should disclose factsregarding the situation. The most important point is that this event hasthe potential to materially impact your finances, and therefore you havea responsibility to disclose it to the bank in some form.
(c) Losing your job would not create a financial liability, although it wouldmost certainly reduce your revenues. You are obviously concerned thatyou might lose your job, but you don’t have specific information thatwould suggest that it will happen. Therefore, you probably don’t havean obligation to disclose this information to the bank. However, unlessyou are relatively certain that you would be able to find suitable employ-ment relatively quickly, you might want to wait until your job situationhas stabilized before pursuing a loan of this size.