Reference no: EM132462760

Carl was the accounting manager at Maine, a tire manufacturer, and he played golf with Heather Thomas, the CEO, who was something of a celebrity in the community. The CEO stood to earn a substantial bonus if Maine increased net income by year-end. Carl was eager to get into Heather's elite social circle; he boasted to Heather that he knew some accounting tricks that could increase company income by simply revising a few journal entries for rental payments on storage units. At the end of the year, Carl changed the debits from "rent expense" to "prepaid rent" on several entries. Later, Heather got her bonus, and the deviations were never discovered.

Requirements:

Initial post:

Question 1. Provide two journal entries, the correct entry that should be made to record the rent payment and the fraudulent entry that Carl made.

Question 2. If the fraudulent entries are recorded, does the accounting equation still equal? How are the assets, liabilities and equity impacted...which are impacted and if so, are they overstated (too high) or understated (too low)?

Question 3. How did the change in the journal entries increase the net income of the company at year-end? Be very specific and provide sufficient detail to suport your answer.

Question 4. Of the four financial statements, which are impacted by the fraud and where in the statement? Be specific and provide sufficient detail to suport your answer.