You are an accountant for Kelberg, Inc., an advertising agency, and you are preparing to close Kelberg’s accounting records for the current year because December 31 is only a few days away. The business owner is planning to apply for a loan from a local bank in early January. To make the financial statements more acceptable to the bank, the owner instructs you to credit a $31,000 advance payment received from a customer on December 27 to a revenue account. Kelberg will not provide the services paid for by this customer until March of next year. The owner also instructs you not to record a year-end adjusting entry for $7,500 of December rent owed to the real estate firm that leases office space to Kelberg.
Required:
(a) If you comply with the owner’s instructions, how will Kelberg’s December 31 balance sheet for the current year be affected? How will the company’s income statement for the current year be affected?
(b) What accounting principles will be violated if you comply with the owner’s instructions?
(c) What will you do in this situation? Identify the parties likely to be affected by your decision to comply or not comply with the owner’s requests. Indicate how each of these parties may be affected by your decision.