A company has borrowed $3,000,000 to expand its production plant. As a condition for the loan, the bank has required that the company maintain a Current Ratio (current assets divided by total current liabilities) of at least 1.50. On December 15th, the company comptroller reports that the costs of expansion have brought the current ratio down to 1.40. The Board is considering what might happen if the business reports this ratio to the bank. One solution is to report revenue from a new sales contract that is scheduled to take effect in January.
1. How would recording this revenue in December affect the current ratio?
2. Is it ethical to record the revenue transaction in December?
3. What accounting principle is relevant to this situation?
4. What course of action should the company take?
1. It will increase the current ratio as this will increase the current assets.
2. No, it is not ethical to record the revenue transaction in December as it's happening in January.
3. Full disclosure principle will apply. The full disclosure principle calls for financial ...
This solution provides brief answers to four questions regarding company ethics in terms of a $3,000,000 loan. The expert discusses how recording this revenue would affect the current ratio, if it is ethical to record the revenue, what accounting principle is relevant to this situation.