Chapter 2, Problem 4ATC

ATC 2-4 Writing Assignment Revenue Recognition and Matching

Glenn’s Cleaning Services Company is experiencing cash flow problems and needs a loan. Glenn has a friend who is willing to lend him the money he needs provided she can be convinced that he will be able to repay the debt. Glenn has assured his friend that his business is viable, but his friend has asked to see the company’s financial statements. Glenn’s accountant produced the following financial statements:

Glenn made the following adjustments to these statements before showing them to his friend. He recorded $82,000 of revenue on account from Barrymore Manufacturing Company for a contract to clean its headquarters office building that was still being negotiated for the next month. Barrymore had scheduled a meeting to sign a contract the following week, so Glenn was sure that he would get the job. Barrymore was a reputable company, and Glenn was confident that he could ultimately collect the $82,000. Also, he subtracted $30,000 of accrued salaries expense and the corresponding liability. He reasoned that since he had not paid the employees, he had not incurred any expense.

Required

a. Reconstruct the income statement and balance sheet as they would appear after Glenn’s adjustments.

b. Write a brief memo explaining how Glenn’s treatment of the expected revenue from Barrymore violated the revenue recognition concept.

c. Write a brief memo explaining how Glenn’s treatment of the accrued salaries expense violates the matching concept.