ATC 6-4 Business Applications Case: Decisions About Materiality

The accounting firm of Eckert & Bell, CPAs, recently completed the audits of three separate companies. During these audits, the following events were discovered, and Eckert & Bell is trying to decide if each event is material. If an item is material, the CPA firm will insist that the company modify the financial statements.

1. In 2019, Carter Company reported service revenues of $4,000,000 and earnings before tax of $240,000. Because of an accounting error, the company recorded $24,000 as revenue in 2019 for services that will not be performed until early 2020.
2. Avery Company plans to report a cash balance of $210,000. Because of an accounting error, this amount is $15,000 too high. Avery also plans to report total assets of $12,000,000 and net earnings of $1,245,000.
3. Lewis Company’s 2019 balance sheet shows a cash balance of $250,000 and total assets of $9,500,000. For 2019, the company had a net income of $850,000. These balances are all correct, but they would have been $7,000 higher if the president of the company had not claimed business travel expenses that were, in fact, the cost of personal vacations for him and his family. He charged the costs of these trips on the company’s credit card. The president of Lewis Company owns 25 percent of the business.

Required

Write a memorandum to the partners of Eckert & Bell, explaining whether each of these events is material.