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.

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Flo Choi owns a small business and manages its accounting. Her company just finished a year in which a large amount of borrowed funds was invested in a new building addition as well as in equipment and fixture additions. Choi’s banker requires her to submit semiannual financial statements so he can monitor the financial health of her business. He has warned her that if profit margins erode, he might raise the interest rate on the borrowed funds to reflect the increased loan risk from the bank’s point of view. Choi knows profit margin is likely to decline this year. As she prepares year-end adjusting entries, she decides to apply the following depreciation rule: All asset additions are considered to be in use on the first day of the following month. (The previous rule assumed assets are in use on the first day of the month nearest to the purchase date.) Required 1. Identify decisions that managers like Choi must make in applying depreciation methods. 2. Is Choi’s rule an ethical…

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Chapter 4, Problem 4.1EI

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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