ASTRA Film Production (ASTRA) wishes to expand and has borrowed RM100,000. 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 at 15th December. Amelia David, 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 ASTRA is to record in December RM10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed. Requirements 3(a). Indicate how recording this revenue in December would affect the current ratio. 3(b). 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.
ASTRA Film Production (ASTRA) wishes to expand and has borrowed RM100,000. As a condition for making this loan, the bank requires that the store maintain a
Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 at 15th December. Amelia David, 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 ASTRA is to record in December RM10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed.
Requirements
3(a). Indicate how recording this revenue in December would affect the current ratio.
3(b). 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.
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