The Following Are Independent Situations Observed by Mersey's Senior Accountant

question 23

Essay

The following are independent situations observed by Mersey's senior accountant at December 31, 2021, the company's year end. Mersey has not adopted the revaluation model for accounting for long-lived assets.
1. The draft financial statements include an item listed under non-current assets "Human resources" but there is no financial amount included.
2. Mersey's employees are paid a bonus based on profit. Mersey's management would like to minimize the amount of bonus paid, and so they instructed a junior accountant to write down inventory by $ 1,000,000 and record a Loss on Inventory. Their argument is that the "fire sale" value of the inventory would be lower than recorded cost by this amount. Mersey has no intention of liquidating the inventory under such circumstances, but expects to sell the inventory in the normal course of business at amounts significantly above cost.
3. A building being constructed for a customer was 90% complete, and accordingly 90% of the related revenue had been correctly included in sales for the year. The total projected cost of construction is $ 600,000. Of the $ 540,000 cost of the project incurred to date, $ 200,000 has been expensed to COGS
4. Mersey owns 5% of the shares of Liverpool Investments. A note to Liverpool's financial statements describes a valuable new patent registered by Liverpool and the anticipated profits that are expected to result. A junior accountant at Mersey recorded an entry "Debit Intangible Assets; Credit Gain on Patent Registration" in the amount of $ 220,000, which is 5% of the amount at which Liverpool has recorded the cost of the patent.
5. In November, Mersey entered into a service contract to provide maintenance services to a client for a fee of $ 20,000 per month. On signing the contract, the client paid Mersey a $ 40,000 deposit on services to be provided. The term of the contract is from December 15, 2021 through December 15, 2022. The $ 40,000 deposit was recorded as Service Revenue.
Instructions
For each of the events, indicate an accounting assumption, concept, constraint, or recognition criteria that have been violated and provide your reason. Prepare the correcting entry required, or if no entry is required, explain what other change, if any, should be made to ensure that Mersey's financial statements comply with GAAP.

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Definitions:

Recurring Activity

An event or task that repeats at regular intervals, often found in calendars and project management tools.

Regular Interval

Consistent, evenly spaced periods of time or points in a sequence or process.

Natural Language

Human language, including both spoken and written forms, that is used for everyday communication.

Appointment Dates

Specific dates and times set for meetings, visits, or other events.