(Solution) - Hardy Rock is proprietor of a jewelry store In January -(2025 Original AI-Free Solution)

Paper Details

Hardy Rock is proprietor of a jewelry store. In January, he applied for a bank loan and was asked to submit an income statement for the past year, ending in December. Near the end of the prior year, Hardy had purchased merchandise for resale that cost him $60,000. He still owed $45,000 for this merchandise at year end. Half of the merchandise was sold during the Christmas holidays for $75,000. Customers owed Hardy $50,000 for these purchases at year end. Hardy included these transactions as part of his financial statements as follows:
Added to revenues ........... $75,000
Added to expenses ........... 7,500
Added to net income ......... $67,500
Hardy reasoned that because he had sold half the merchandise in December, he should report it as revenue, though he had not received all of the cash from customers. Also, he reasoned that because he had paid $15,000 for the merchandise by year end and had sold half of the merchandise, he should report $7,500 of this amount as cost of goods sold.

Required
What problems do you see with Hardy?s reasoning? Is there an ethical problem with Hardy?s treatment of these transactions? What should the effect of these transactions have been on net income?