Accounting Thinking Problem

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Hi there, I need help with some of these questions. Any tips would be great! Thanks!

"For each of the following unrelated situations (i) Prepare the correcting journal entry required and (ii) discuss two component of the conceptual framework that were violated and how (specifically, you should discuss one qualitative charateritic and one element or foundational principle per situation. If you choose representational faithfulness or relevance for any of the scenarios, be specific about what aspect of representational faithfulness or relevance has been violated). (For situation b) below, discuss 2 CF components for each of 2011 & 2012).

a) High Voltage Inc. provides electrical repair services to companies in the manufacturing sector. During the current year they purchased some equipment for $150,000. They found that using this equipment made them much more productive and so felt the value of the equipment was greater than they had paid for it. On one project in particular, they think they spent about $20,000 less in labour costs then they had originally estimated. Accordingly, they made the following entry in their books:

Equipment $20,000
Cost of Goods Sold – Labour $20,000

b) On January 15, 2012, the VP Finance of Deadbeat Inc., Clem Countem receives notice that one of their major customers, Dewey and Howe, which accounts for nearly 20% of their revenue is in the process of declaring bankruptcy. Unfortunately, this company also owes 25% or $50,000 of the total receivables outstanding of $200,000. To further complicate matters, Clem realizes that if he writes off the receivables and adjusts his bad debt expense, he will cause an issue with his bank covenant which maintains a current asset / current liability ratio of 1.5 to 1. This may cause the bank to call the company’s loan and put the company in a position with no financing. Clem comes to you the CFO with the following suggestions: (i) For our December 31, 2011 financial statements nothing is required since the company was not in bankruptcy in 2011 (ii) For the 2012 Financial statements we should disclose the possible loss related to Dewey and Howe to alert our investors of the issue. However, it is expected that the bankruptcy process will take about 3 years, so no journal entry will be needed until at least 2014."
 

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