The net income of Accent Photography Company decreased sharply during 2009. Lisa Brown, owner of the company, anticipates the need for a bank loan in 2010. Late in 2009, Brown instructed the accountant to record a $20,000 sale of portraits to the Brown family, even though the photos will not be shot until January 2010. Brown also told the accountant not to make the following December 31, 2009, adjusting entries:
Salaries owed to employees 5,000
Prepaid insurance that has expired 1,000
1. Compute the overall effect of these transactions on the company’s reported income for 2009. Is reported net income overstated or understated?
2. Why did Brown take these actions? Are they ethical? Give your reason, identifying the parties helped and the parties harmed by Brown’s action. 3. As a personal friend, what advice would you give the accountant?