Rolls-Royce Holdings plc derives its revenues from long-term contracts in its marine business and uses the percentage-of-completion method to recognize its revenues. The UK Government recently awarded Rolls-Royce a contract to develop a new propulsion system for submarines. Assume that the total value of this contract is £3 billion and is expected to take three years, and cost £500 million in each year. The actual costs in the first year were as expected. After the first year of the contract, suppose that Rolls-Royce recognized £2 billion of revenues. Revenues Expenses Retained Earnings Explanation: 4
Part IV: Accruals and Earnings Management (15 points) The net income of Lamek Photography plc decreased significantly during 2016. Rose Carpenter, owner of the company, anticipates that the company will need a bank loan in 2017. Late in 2016, Carpenter instructed Tekin Almond, the accountant and a friend of yours, to record a £8,000 sale of portraits to the Carpenter family, even though the photos will not be shot until February 2017. Carpenter also told Almond not to make any entries on December 31, 2016 for the following transactions: Salaries owed to employees who worked in 2016 . . . . . . . . . . £12,000 Prepaid rent that expired in 2016 . . . . . . . . . . . . . . . . . . . . . . £1,000 1.Compute the effect of this alternative transaction structure on the Lamek’s reported netincome for 2016. Are earnings understated or overstated (and by how much)? 2.Why did Carpenter take these actions? Provide a short discussion of the parties that arehelped by and those that are harmed by Carpenter’s actions. 3.As a friend of Tekin’s, what would be your advice to him?
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