Chapter 10, Problem 10.1FC

Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better.

After reviewing the annual reports, the CEO, N. O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, "We've decided we are going to move all our long-term and held-to-maturity investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end."

Carl made the adjustments. The subsequent year, the economy turned, and the company's travel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?

2. What type of information in the financial reports would have helped the bank detect this reclassification?

3. Has a fraud occurred? If so, what is the fraud?