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Chapter 4: Q1EI (page 247)

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 1. Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio. 2. 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.

Short Answer

Expert verified

(1) Revenue transaction will be recorded by debiting cash and crediting service revenue by $10,000. It will increase current ratio.

(2) It is not ethical, as it violates the revenue recognition principle.

Step by step solution

01

Step-by-Step-SolutionStep 1: Journal Entry for  recording revenue

Following journal entry will be recorded:

Date

Accounts and Explanation

Debit

Credit

Cash

$10,000

Service Revenue

$10,000

To record service revenue

02

Effect on current ratio

Recording revenue will increase the cash balance of the business, which is the part of current assets. As current asset is increased, current ratio will also increase. There will be no change in the current liabilities.

03

Ethical Issue

As per the revenue recognition principle, revenue will be only recorded in the books of accounts when goods or services is provided to the customers. In the given case, service will be provided in next year, hence it should be recorded in next year only.

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Most popular questions from this chapter

Benson Auto Repair had the following account balances after adjustments. Assume all accounts had normal balances.

Cash \( 4,000 Common Stock \) 20,000

Accounts Receivable 3,200 Retained Earnings, January 1 15,700

Prepaid Rent 1,900 Dividends 2,100

Office Supplies 3,000 Service Revenue 1,600

Equipment 34,800 Depreciation Expense鈥擡quipment 300

Accumulated Depreciation鈥擡quipment 1,600 Salaries Expense 800

Accounts Payable 5,400 Rent Expense 500

Notes Payable (long-term) 7,000 Utilities Expense 600

Supplies Expense 100

14. Prepare the closing entries for Benson at December 31.

15. What is the balance of Retained Earnings after closing entries have been recorded? (Use a T-account to determine the balance.)

For each account listed, identify whether the account would appear in either the income statement section or the balance sheet section of the worksheet. Assuming normal balances, identify if the account would be recorded in the debit (DR) or credit (CR)

column.

9. Accounts Payable

For each account listed, identify the category in which it would appear on a classified balance sheet. a. Office Supplies b. Interest Payable c. Retained Earnings d. Copyrights e. Land f. Accumulated Depreciation鈥擣urniture g. Land (held for long-term investment purposes) h. Unearned Revenue i. Notes Payable (due in six years)

A partial worksheet for Aaron Adjusters is presented below. Solve for the missing information. J K L M 33 34 35 \( 61,400 (g) (d) \) 22,400 (b) (e) (a) (f) Debit Credit Debit Credit Income Statement Balance Sheet Net (c) Total $ 61,400.

For each account listed, identify whether the account would appear in either the income statement section or the balance sheet section of the worksheet. Assuming normal balances, identify if the account would be recorded in the debit (DR) or credit (CR)
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