Chris Nelson, the new assistant controller for Grand Company, is preparing for the firm’s year-end closing procedures. On December 30, 2019,a memorandum from the controller directed Nelson to make a journal entry debiting Cash and crediting Long-Term Advances to Officers for $1,000,000 . Not finding the $1,000,000 in the cash deposit prepared for the bank that day, Nelson went to the controller for a further explanation. In response, the controller took from her desk drawer a check for $1,000,000 payable to Grand Company from Jason Grand, chief executive officer of the firm. Attached to the check was a note from Jason Grand saying that if this check were not needed to return it to him next week. “This check is paying off a$1,000,000 advance the firm made to Jason Grand six years ago,”stated the controller.“ Mr.Grand has done this every year since the advance; each time we have returned the check to him in January of the following year. We plan to do so again this time. In fact, when Mr. Grand retires in four years, I expect the board of directors will forgive this advance. "However, if the firm really needed the cash, we would deposit the check.” “Then why go through this charade each year?” inquired Nelson. “It dresses up our year-end balance sheet,”replied the controller.“ Certain financial statement ratios are improved significantly. Further, the notes to the financial statements don’t have to reveal a related-party loan. Lots of firms engage in year-end transactions designed to dress up their financial statements.” Required a. What financial statement ratios are improved by making the journal entry contained in the controller’s memorandum? b. Is the year-end handling of Jason Grand’s advance an ethical practice? Discuss.

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

Problem 1Q

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Chris Nelson, the new assistant controller for Grand Company, is preparing for the firm’s year-end closing procedures. On December 30, 2019,a memorandum from

the controller directed Nelson to make a journal entry debiting Cash and crediting Long-Term Advances to Officers for $1,000,000 . Not finding the $1,000,000 in the cash deposit prepared for the bank that day, Nelson went to the controller for a further explanation. In response, the controller took from her desk drawer a check for $1,000,000 payable to Grand Company from Jason Grand, chief executive officer of the firm. Attached to the check was a note from Jason Grand saying that if this check were not needed to return it to him next week.

“This check is paying off a$1,000,000 advance the firm made to Jason Grand six years ago,”stated the controller.“ Mr.Grand has done this every year since the advance; each time we have returned the check to him in January of the following year. We plan to do so again this time. In fact, when Mr. Grand retires in four years, I expect the board of directors will forgive this advance.

"However, if the firm really needed the cash, we would deposit the check.”

“Then why go through this charade each year?” inquired Nelson.

“It dresses up our year-end balance sheet,”replied the controller.“ Certain financial statement ratios are improved significantly. Further, the notes to the financial statements don’t have to reveal a related-party loan. Lots of firms engage in year-end transactions designed to dress up their financial statements.”

Required

a. What financial statement ratios are improved by making the journal entry contained in the controller’s memorandum?

b. Is the year-end handling of Jason Grand’s advance an ethical practice? Discuss.

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