Question

Chris P. Bacon is the chief accountant for CV Industries, a large manufacturing company. In addition to its normal business activities, the company has excess warehouse space that it rents out to local businesses. Because the typical renter is a small business, CV Industries requires renters to make lease payments for the entire rental period on the day the lease is signed. As a result, CV Industries typically reports a large unearned rent balance on its balance sheet.

After making adjusting entries for the current year, Chris prepares the adjusted trial balance and notices that the company's earnings will decline significantly. He presents the adjusted trial balance to the company's CFO, Antonio Beldin, who is concerned about the earnings decline. Mr. Beldin notices the large unearned rent balance and proposes making an additional end-of-period adjusting entry to recognize the entire unearned rent balance as revenue in the current period. Christ protests, reminding Mr. Beldin that the adjusting entry for unearned rent has already been made. Mr. Beldin assures Chris that his proposal is acceptable, reminding Christ that "because we have already received the cash, they have the right to recognize the revenue in the current period." He instructs Christ to make the additional adjusting journal entry. Chris is hesitant to follow these instructions, but he is sensitive to the company's emphasis on earnings growth and makes the adjusting entry as instructed.

1. Is Christ behaving ethically? Why or why not?

2. Who is affected by Chris's decision?

Answer 1

1. Is Chris behaving ethically?

The accrual basis of accounting states that the revenue can only be recorded in the period when it is accrued. If it is recognised before it's earned, then it doesnt signify the actual revenue during the period.

In the given case chris has recognised the entire revenue in the current period and hence Chris is not behaving ethically.

2. Who is affected by Chris's decision?

The objective of financial reporting is to track, analyze and report the business income. The purpose of the financial statements is to examine resource usage, cash flow, business performance and the financial health of the business. This helps the Company and the investors make informed decisions about how to manage the business.

This means the investors and the lenders are the parties who analyse and track the performance of the entity.

In the given case investors and the lenders (if any) are the affected parties.