Grant Film Productions wants to expand and has borrowed $100,000. As a condition
ID: 2378165 • Letter: G
Question
Grant Film Productions wants to expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the store maintain a current ratio of at least 1.50.
Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 by December 15. Rita Grant, owner of the business, is considering what might happen if she reports a current ratio of 1.40 to the bank. One course of action for Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed.
how recording this revenue in December would affect the current ratio.
Is it ethical to record the revenue transaction in December.
Is the accounting principle relevant to this situation.
Give the reasons underlying your conclusion.
Explanation / Answer
Of course this violates many tenets of the accounting profession.
The true correct answer is that it would have no effect on the current ratio, as you, being an ethical accountant, would refuse to make such an entry.
If you were to make the entry though, the entry would be:
Debit Accounts Receivable $10,000
Credit Revenue $10,000
This will increase current assets and increase equity. Since current assets would increase and there is no change to the current liabilities, their current ratio would increase; perhaps enough to get them to 1.50
But this is unethical and could be illegal as well as it could be a form of theft against the bank if the bank would have called the loan; and if the bank suffers a loss as a result. This is called bank fraud.
In addition, they are overstating income and earnings per share for the year. If they are a publicly held company, and shareholders rely on the published results to make investment decisions. The company, and the corporate officers, could be liable to the shareholders for any losses they (the shareholders) suffer once news of the fraud becomes public.
All in all, a bad idea for many reasons.
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