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Lesson details
- Estimated study time
- 35 min
Learning objectives (4)
An accounting memo explains a decision so that another person can check it. It identifies the question, relevant facts, applicable guidance, reasoning, and conclusion. A list of quotations does not show how a requirement applies.
This standalone exercise concerns Linden Peak Instruments, a fictional manufacturer preparing December 31 financial statements under United States generally accepted accounting principles (US GAAP). Its ledger shows a $72,000 credit to Equipment posted on December 29. Purchasing says the credit relates to a machine acquired on December 20, but the supplier's agreement and credit memorandum have not been obtained.
Your task is to define the issue and missing evidence, not to invent the documents or select a final entry without them.
Ask a question that can be answered
"Research the supplier credit" leaves the accounting question unclear. A more useful question is:
Does the $72,000 supplier credit adjust the machine's acquisition cost, or does it concern another transaction or period? What correction, if any, is needed in Linden Peak's December 31 statements?
The question does not assume that the account used in the posted entry is correct. The answer depends on the agreement and prior accounting.
Separate a recorded fact from an explanation
An established fact has identified support. An assertion is an explanation that still needs support. An assumption is a stated condition used for analysis, not evidence that the condition actually holds.
| Status | Information | What to do with it |
|---|---|---|
| Established | The ledger contains a $72,000 Equipment credit dated December 29. | Confirm what was posted, without treating the posting as proof of correct treatment. |
| Asserted | Purchasing says it concerns the December 20 machine. | Obtain the supplier's credit memorandum and agreement. |
| Open | The conditions attached to the credit are unknown. | Ask whether it depends on this machine, future purchases, a dispute, or another arrangement. |
| Open | Prior recording of the credit is unknown. | Reconcile the invoice, payable, payments, and equipment records to prevent duplicate recording. |
If documents conflict with someone's explanation, record the disagreement. For each missing item, name who will obtain it and when. Identify which accounting decision cannot yet be completed.
Apply guidance to the facts
The Financial Accounting Standards Board's Accounting Standards Codification (ASC) is the authoritative source of nongovernmental US GAAP. Research must check the guidance's transaction scope, definitions, relevant requirements, and effective date. Record the exact Topic-Subtopic-Section-paragraph address and the date accessed so that a reviewer can retrace the work.
The conceptual framework explains ideas behind standards, but does not override the Codification. Textbooks and other explanations can help you understand a requirement; they do not establish that it applies.
Write the analysis as a connection between a requirement and evidence. For this credit, an unconditional price adjustment for the specified machine would raise different questions from a credit earned only through future purchases. Do not assume those facts merely because they would make one treatment convenient.
A credible alternative deserves an answer. Explain which fact or requirement rules it out, or state what remains unresolved. If a treatment affects a loan condition or a manager's bonus, check the evidence carefully; that incentive is not itself proof of an error.
State what can be concluded now
The supplied record supports this preliminary conclusion:
The posting is established, but its treatment is not yet supported. Obtain the agreement and credit memorandum, confirm the transaction and conditions, and reconcile prior entries. Then apply the relevant current guidance before accepting or correcting the Equipment credit.
The memo should assign that work, not simply say "more research needed." Purchasing can obtain the supplier documents; the accountant can reconcile the entries; the controller can review the proposed conclusion.
Once the evidence supports a treatment, explain the entry and related effects. A change to equipment cost may also affect depreciation. Check the payable or cash side, income, ending equity, presentation, and applicable note requirements. Do not describe these possible effects as established amounts before the facts and calculations support them.
Check your understanding
Write a one-sentence issue for the $72,000 credit. Identify one established fact, one unsupported assertion, and two evidence requests. Explain why a final accounting conclusion is not yet justified.
Compare a sample response
The issue is whether the supplier credit changes this machine's acquisition cost or belongs to another transaction or period in the December 31 statements.
The ledger establishes the $72,000 Equipment credit on December 29. Purchasing's statement about the machine is not yet corroborated. Request the agreement and credit memorandum, and reconcile the invoice, payable, payments, and equipment entries. Without those records, the accountant cannot establish the credit's conditions or whether it was recorded before.
Use Chapter 4 practice: statements, notes, and research for short memo exercises with supplied facts.
The Linden Peak case offers a longer, separate exercise combining a supplier credit with installation invoices. All of that case's facts are supplied there.