accounting question...?

Question

Jex Varner, chief financial officer of Wyndam, Inc., is involved in a meeting with the firm’s
newly hired external auditors, Ernst & Price. The external auditors have noted several
adjusting entries that they believe should be reflected in the current period’s financial
statements. Specifically, there are questions regarding $400,000 of cash that has been
received (and recorded as revenue) but not yet earned. The auditors feel that this
amount should be recognized as a liability.

Jex counters that the firm’s policy has always been to recognize revenue when the cash
is received. He states that $350,000 of cash was received in December of last year,
earned in January, and no adjustment was made. To be consistent, he continues, he
doesn’t believe any adjustments should be made this year.

As a member of the external auditing team, do you agree with Jex’s reasoning? If you
think that an adjustment needs to be made, what journal entry would you propose? What
should be done about the $350,000 that has been earned this year even though the cash
was received last year?

Answer 1

Just because you made a mistake last year doesn't mean you have to perpetuate it. The consistency principle doesn't apply to errors. Revenue recognition is governed by IAS 18. The matching principle alone would not allow such recognition of revenue that Wyndam has been practising.

Regarding the current yr's $400k, I would push for the adjustment to be made (assuming the amt is material to the co's a/cs):
Dr Revenue 400k
Cr Unearned revenue 400k (liab a/c)

Regarding last yr's $350k, (assuming the amt is material to last yr's a/cs), I would propose that a restatement be made to retained earnings with comparatives restated in the balance sheet, i.e., put through a prior yr adjustment:(PYA):
Dr Opening retained earnings 350k
Cr Unearned revenue 350k
The above would impact last yr's a/cs. Once you bring forward the unearned revenue a/c to this year and once it's earned, you'd:
Dr Unearned revenue 350k
Cr Revenue 350k
To do a PYA, you need to restate last yr's income statement, last year's balance sheet, last yr's cash flow statment, and last yr's statement of changes in equity in which the retained earnings section would need a "As previously reported" and a "As restated" line.

Answer 2

My question, is the year where they should ve recognized that revenue at is closed permanently?

because normally companies has a 13 period where in the 13th period they could come back and make needed adjustment if the december is closed permanently,

I beleive if they have the cash basis accounting method and they received the money in december, it should show in december or at least in the previous year (13th period) to have accurate financial statement or they r gonna get in trouble...

because if they add it to the current year and it s cash basis, means that they have money hanging there where it shouldnt and if they still can make the accouting entry in the previous year it should be this way:

Debit Cash (becuz there is an entry of money) and credit Merchandise or whatever was sold and you have to offset the entry that you made in january by reversing it....

Answer 3

It depends on how the company chooses to recognize revenue and they need to be consistent.

Assets and liabilities need to balance.

Cash $400,000 (Assets) Shareholder Equity $400,000

A=L + SE

December: Cash $400,000 Unearned Revenue: $400,000

January: Sales $350,000 Unearned Revenue: (350,000)

Accounting is pretty simple. You need to make sure the accounts balance and that they make sense. You shouldn't have to struggle with it in terms of elaborate reasons.