Ethical Issue Case Summary: Company G has borrowed $100,000 from a bank for expansion. The bank has put a condition that Company G should maintain a current ratio of 1.50. Business is not great for Company G, and as a result of the expansion the current ratio is down to 1.40. To save the situation, R the owner is contemplating to record revenue of $10,000 in December, even though it would be earned in next January, as the contract for the job is signed. To Journalize: The revenue transaction, and indicate how this will affect the current ratio.

Question

Bob Jacobs wishes to expand his business and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.50. Business has been good but not great. The expansion costs have brought the current ratio down to 1.20 in the middle of December. Bob, as the owner of the business, is considering what might happen if he reports a current ratio of 1.4 to the bank. One possible action for Bob is to record in December $10,000 of revenue that the business will earn in January of next year. He thinks this is doable because the contract for this job has been signed. Journalize the revenue transaction and indicate how recording this revenue in December would affect the current ratio. Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation. and give the reasons underlying your conclusion. Propose an ethical action for Bob Jacobs.

Answer 1

Question

Chapter 4, Problem 4.1CTEI

1.

To determine

Ethical Issue

Case Summary: Company G has borrowed $100,000 from a bank for expansion. The bank has put a condition that Company G should maintain a current ratio of 1.50. Business is not great for Company G, and as a result of the expansion the current ratio is down to 1.40. To save the situation, R the owner is contemplating to record revenue of $10,000 in December, even though it would be earned in next January, as the contract for the job is signed.

To Journalize: The revenue transaction, and indicate how this will affect the current ratio.

2.

To determine

To Discuss: If it is ethical to record the revenue transaction in December, and identify the accounting principle being violated by this.

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Bob Jacobs wishes to expand his business and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.50. Business has been good but not great. The expansion costs have brought the current ratio down to 1.20 in the middle of December. Bob, as the owner of the business, is considering what might happen if he reports a current ratio of 1.4 to the bank. One possible action for Bob is to record in December $10,000 of revenue that the business will earn in January of next year. He thinks this is doable because the contract for this job has been signed. Journalize the revenue transaction and indicate how recording this revenue in December would affect the current ratio. Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation. and give the reasons underlying your conclusion. Propose an ethical action for Bob Jacobs.

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