Question

Glenn's Cleaning Services Company is experiencing cash flow problems and needs a loan. Glenn has a friend who is willing to lend him the money he needs provided she can be convinced that he will be able to repay the debt. Glenn has assured his friend that his business is viable, but his friend has asked to see the company's financial statements. Glenn's accountant produced the following financial statements:

Income Statement Balance Sheet $38,000 Operating Expenses7,00 Liabilities S132000 $85,000 Service Revenue Assets $35,000 Stockholders' Equity Common Stock Net Loss 82,000 Retained Earnings 132,000) Total Liabilities and Stockholders' Equity

Glenn made the following adjustments to these statements before showing them to his friend. He recorded $82,000 of revenue on account from Barrymore Manufacturing Company for a contract to clean its headquarters office building that was still being negotiated for the next month. Barrymore had scheduled a meeting to sign a contract the following week, so Glenn was sure that he would get the job. Barrymore was a reputable company, and Glenn was confident that he could ultimately collect the $82,000. Also, he subtracted $30,000 of accrued salaries expense and the corresponding liability. He reasoned that since he had not paid the employees, he had not incurred any expense.

1. Reconstruct the income statement and balance sheet as they would appear after Glenn's adjustments.

2. Write a brief memo explaining how Glenn's treatment of the expected revenue from Barrymore violated the revenue recognition concept. .

3. Write a brief memo explaining how Glenn's treatment of the accrued salaries expense violates the matching concept.

Answer 1

Glenn's Cleaning Services Adjusted Income statement
Particulars	Amount
Service Revenue	120000
(38000+82000)
Less: Operating Expense	(40000)
(70000-30000)
Net Income	80000

Glenn's Cleaning Services Balance Sheet
Particulars	Adjusted	Un adjusted
Asset	85000	85000
Account receivable	82000
Total Assets	167000	85000
Liability (35000-30000)	5000	35000
Common stock	82000	82000
Retained Earning	80000	(32000)
Total Liability & Stock holders equity	167000	85000

Statement of changes in owner's equity

Particulars	Amount
Opening Balance of Stock holders equity	82000
Add: Additional contribution or issue	-
Add: Retained earnings	80000
Less: Buyback / Withdrawal	-
Closing Balance of Share holder's equity	162000

2. In IFRS 15: Revenue from Contracts with Customers. 5 steps are given to recognize revenue.

1. There should be a Customer contract.

2. Each Parties performance obligations are identified in the contract.

3. Price of the performance obligation has been identified.

4. Allocation of transaction price according to the performance obligations in the contract has been done.

5. Recognition of revenue when performance obligation are met.

Here, Performance obligation is cleaning the headquarter office building. As we know the contract is only in its negotiation stage and not yet signed. There is no valid Customer contract. The revenue recognition fails in first step itself. Therefore, Glenn treatment of identifying $82000 as revenue before even entering into a contract with the customer Barrymore Manufacturing Company is in contradiction of revenue recognition concept.

3. Matching Concept states that expenses of a particular period should be matched with the revenues of that particular period whether or not they are paid in that period. Therefore, the decision removing $30000 accrued salary expense and its corresponding liability just because it was not paid in that period is wrong. Glenn's decision clearly go against the matching concept.