Do Two Wrongs Make a Right?
Response to the following problem:
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?