Fenco Corporation's stock price recently collapsed on news that its chief financial officer resigned. It seems the company had deliberately failed to follow generally accepted principles in an attempt to support a 30% income growth rate. The company announced that it would be restating the 20X7 results. Information about Fenco’s financial condition and stock price follow:

The following information is necessary to correct 20X7’s data.

As of December 31, 20X7, Fenco’s CFO withheld adjusting entries for accruals relating to wages, utilities, and similar items. The total of such items amounted to \($855\),000.
During the year, Fenco presold certain services to its clients. All such sales were booked as revenues, even though \($625\),000 had not been “earned” as of the end of 20X7.
Fenco purchased \($3\),000,000 of equipment on July 1, 20X7. These assets had a 5-year life and no salvage value. Fenco neglected to depreciate these assets during 20X7.

Fenco began 20X7 with \($50\),000 in a Prepaid Rent account. The rent related to 20X7, but no adjusting entry was recorded in this account during 20X7.

Fenco offered customer rebates for services delivered in 20X7. As of the end of 20X7, Fenco owes \($135\),000 in rebates. The rebates will not be processed before February, 20X8. The CFO indicated that no entry was necessary before actual payment.

(a) Determine the correct amounts to report for 20X7 (net income, and assets, liabilities, and equity).

(b) Is the collapse in stock price justified, and what pressures might a CFO face to participate in a scheme to manipulate income?

(c) How can a business person prepare themselves to avoid succumbing to pressures to “fudge”o n accounting numbers?

Transcribed Image Text:

Reported Annual Net Income Reported Assets Reported Liabilities Reported Stockholders' Equity Stock Price Per Share Dec. 31, 20X4 $ 2,500,000 $ 7,600,000 $3,800,000 $ 3,800,000 $20.20 Dec. 31, 20X5 3,275,000 9,804,000 2,729,000 7,075,000 35.00 Dec. 31, 20X6 4,323,000 13,627,560 2,229,560 11,398,000 60.75 Dec. 31, 20X7 5,576,670 18,942,308 1,967,638 16,974,670 98.90 Jan. 31, 20X8 n/a n/a n/a n/a 11.50