Happy Trails, Inc., is a popular family resort just outside Yellowstone National Park. Summer is the resort’s busy season, but guests typically pay a deposit at least six months in advance to guar-antee their reservations. The resort is currently seeking new investment capital in order to expand operations. The moreprofitable Happy Trails appears to be, the more interest it will generate from potential investors.Ed Grimm, an accountant employed by the resort, has been asked by his boss to include $2 millionof unearned guest deposits in the computation of income for the current year. Ed explained to hisboss that because these deposits had not yet been earned they should be reported in the balancesheet as liabilities, not in the income statement as revenue. Ed argued that reporting guest depositsas revenue would inflate the current year’s income and may mislead investors. Ed’s boss then demanded that he include $2 million of unearned guest deposits in the computa-tion of income or be fired. He then told Ed in an assuring tone, “Ed, you will never be held respon-sible for misleading potential investors because you are just following my orders.” InstructionsShould Ed Grimm be forced to knowingly overstate the resort’s income in order to retain his job?Is Ed’s boss correct in saying that Ed cannot be held responsible for misleading potential investors?Discuss.
Happy Trails, Inc., is a popular family resort just outside Yellowstone National Park. Summer is
the resort’s busy season, but guests typically pay a deposit at least six months in advance to guar-
antee their reservations.
The resort is currently seeking new investment capital in order to expand operations. The more
profitable Happy Trails appears to be, the more interest it will generate from potential investors.
Ed Grimm, an accountant employed by the resort, has been asked by his boss to include $2 million
of unearned guest deposits in the computation of income for the current year. Ed explained to his
boss that because these deposits had not yet been earned they should be reported in the balance
sheet as liabilities, not in the income statement as revenue. Ed argued that reporting guest deposits
as revenue would inflate the current year’s income and may mislead investors.
Ed’s boss then demanded that he include $2 million of unearned guest deposits in the computa-
tion of income or be fired. He then told Ed in an assuring tone, “Ed, you will never be held respon-
sible for misleading potential investors because you are just following my orders.”
Instructions
Should Ed Grimm be forced to knowingly overstate the resort’s income in order to retain his job?
Is Ed’s boss correct in saying that Ed cannot be held responsible for misleading potential investors?
Discuss.
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