Question

Grant Film Productions wishes to expand 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. Expansion costs have brought the current ratio down to 1.40 on December 15. Rita Grant, 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 Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed.

Requirements

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

Answer 1

Requirement 1
Date		Accounts and Explanation				Debit	Credit
	31-Dec	Accounts Receivable				10,000
		Revenue					10,000
Accounts receivable will increase, this will cause the current assets to increase.
Curent liabilities will remain unchanged
Requirement 2
As per accounting principle of revenue recognition revenues are to be recognised
only when they are earned.
Although they are entering false information to attract more capital, this action it is
unethical, as they are entering wrong information to increase their current ratio.
these are unearned revenues to be reported as liabilities in balancesheet