Roy rogers is the accounting manager at tire, inc., a tire manufacturer. he plays golf with the ceo, who is somewhat of a celebrity in the local community. the ceo would be able to receive a huge bonus if the company increases net income by the end of the year. roy, wanting to become part of the elite circle the ceo was in, explained he knows some tricks to increase the company income. this would require revising some journal entries on the rent paid on storage units used by the company. roy changed the rental payments to prepaid rent, allowing the ceo to receive his bonus and the revisions were never discovered.

by roy changing the journal entries, how did it cause the net income to increase and the ceo to get his bonus?
with the change of the journal entries, who gained and who lost?
what are the consequences of roy’s actions if they are discovered?

Explanation:

(1) Roy has changed the rates for prepaid rent. It is important to note that employ costs are investments and deferred rent is a current account of cash. Ideally the following paragraph should have been submitted by Roy: (I took the sum of $100 for the illustration) :

Account                    Debit    Credit

Rental expenses       $100  

Cash                                        $100

=> Yet Roy has passed this entry and has not passed the one above :

Account                        Debit    Credit

Prepaid Rent          $100  

Cash                                             $100

As we have seen, no leasing cost was shown in the firm's income statement when the first payment was not made. In other terms, the net income of the organisation was inflated falsely by $100. $100 will be included in the current account section as accrued rent in the deposits and charged as expenses in the income statement of the next year. The consequence of this journal entry is that the amount of net income is falsely raised by the number of payments shown as prepaid rentals.

(2) With the increase in log entries he will receive a higher premium this year as his payment is related to net income. Whoever lost all those stakeholders fails who depends on the financial statements of the organization to decide.

For example, banks would lose because they assume the financial position of the firm is much greater than its actual position.

(3) Roy's decisions can have far-reaching and important consequences for him. This is an accounting fraud case and therefore legal proceedings against both the administrator and the Director at the direction of whose accounts the crime is committed can be taken. It is very probable that the accountant will also be losing his job in the company and face actions by professional bodies such as ACCA, AICPA, etc. because he breaches the corporate ethical guideline and Code.