The accounting firm of Brooke & Doggett, CPAs, recently completed the audits of three separate companies. During these audits, the following events were discovered, and Brooke & Doggett is trying to decide if each event is material. If an item is material, the CPA firm will insist that the company modify the financial statements.
1. In 2016, Major Company reported service revenues of $1,000,000 and earnings before tax of $80,000. Because of an accounting error, the company recorded $6,000 as revenue in 2016 for services that will not be performed until early 2017.
2. Willis Company plans to report a cash balance of $70,000. Because of an accounting error, this amount is $5,000 too high. Willis also plans to report total assets of $4,000,000 and net earnings of $415,000.
3. Adams Company’s 2016 balance sheet shows a cash balance of $200,000 and total assets of $9,000,000. For 2016, the company had a net income of $750,000. These balances are all correct, but they would have been $5,000 higher if the president of the company had not claimed business travel expenses that were, in fact, the cost of personal vacations for him and his family. He charged the costs of these trips on the company’s credit card. The president of Adams Company owns 25 percent of the business.
Write a memorandum to the partners of Brooke & Doggett, explaining whether each of these events is material.