The net income of Drogon's Photography Company decreased sharply during 2016. Jaime Lannister, owner of the company, anticipates the need for a bank loan in 2017. Late in 2016, Lannister instructed Peter Baelish, the accountant and a personal friend of yours, to record a $15,000 sale of portraits to the Lannister family, even though the photos will not be shot until January 2017. Lannister also told Baelish not to make the following December 31, 2016, adjusting entries:
Salaries owed to employees $14,000
Prepaid insurance that has expired $2,000
1. Compute the overall effect of these transactions on the company's reported income for 2016. Is reported net income overstated or understated?
2. Why did Lannister take these actions? Are they ethical? Give your reason, identifying the parties helped and the parties harmed by Lannister's action.
3. As a personal friend of Peter Baelish's, what advice would you give him?