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

question 102

Essay

The following are independent situations observed by Mersey's senior accountant at December 31, 2014, 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.
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, 2014 through December 15, 2015. 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:

Gas Exchange

The biological process by which gases (such as oxygen and carbon dioxide) are transferred between living organisms and the environment, typically occurring in the lungs in humans and across the surfaces of leaves in plants.

Endosymbiosis

A theory explaining the origin of eukaryotic cells from prokaryotic organisms through a symbiotic relationship.

Chloroplast

A type of organelle found in plant cells and some algae, which is the site of photosynthesis and responsible for producing energy through light.

Thylakoid Membrane

The thylakoid membrane is a component of chloroplasts that houses the machinery for the light reactions of photosynthesis, including the chlorophyll pigments.