Ladner Bread wishes to expand its business and has borrowed $100,000 from Bank. As a condition for making this loan, the bank required Ladner Bread to maintain a current ratio of at least 1.50 and a debt of no the more than 0.50, and to submit annual financial statement to the bank. Business during the third year has been good but not great. Expansion costs have brought the current ratio down to 1.40 and the debt ratio up to 0.51 at November 15. The managers of Ladner Bread are considering the implication of reporting this current ratio to Bank. One course of action that the managers are considering is to record in November of the third year some revenue on account that Ladner Bread will earn in January of the next year. The contract for this job has been signed, and Ladner Bread will deliver the materials during January.
1. Journalize the revenue transaction using your own numbers, and indicate how recording this revenue in November would affect the current ratio and the debt ratio.
2. State whether it is ethical to record the revenue transaction in November. Identify the accounting criteria to this situation.
3. Propose an ethical course of action for Ladner Bread.
If they recorded the revenue early, it would look like this:
Accounts Receivable 200,000
The current ratio is current assets / current liabilities. While revenue isn't an asset or liability, the cash received from revenue is a current asset, which is why they're trying to illegally record the revenue early. It would increase current year income due to the financial statements showing an increase in cash/AR. Current assets increase ...
This solution provides the correct journal entries for Ladner Bread, showing how recording the revenue early would affect the current ratio and debt ratio. This solution also states whether it is ethical to record the revenue early, including citing the accounting criteria, and proposes an ethical course of action for Ladner Bread.