The following paragraphs describe fraudulent accounting committed by the company Rite-Aid in 1999. After reading the paragraphs, list the journal entries you think Rite-Aid would have used to do what is described here. You will have to make an educated guess as to what journal entries the company would use to cover up the fraud.

Rite Aid improperly failed to account for stock appreciation rights ("SARS") granted to employees. In May 1995, Rite Aid granted SARS to certain field managers. These SARS gave the holders the right to receive in cash or Rite Aid stock an amount equal to the change in the price of Rite Aid's stock between the date of grant and the vesting date. Under GAAP, Rite Aid should have recorded an accrued expense each quarter based on the then-current market price of Rite Aid stock. Rite Aid never recorded any such accruals. In FY 1998 and FY 1999, Rite Aid should have recorded an accrued expense of approximately $22 million and $33 million, respectively.

Grass personally signed the letters addressed to each individual employee receiving the SARS. Although Bergonzi falsely told a member of Rite Aid's audit firm that no SARS had been issued, he later acknowledged to another Rite Aid employee that he knew about the SARS.

Answer rating: 100% (QA)

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