1. Journalize the revenue transaction and indicate how recording this revenue in December would affect the current ratio
From the case, it has been indicated that the bank requires Grant Film Productions to maintain its current ratio at 1.50 but on December the business is not great for the company, and this decreases its current ratio to 1.40. Since the business owner opts to record in December $10,000 of revenue that the business will earn in January of the following year, this would be entered in unearned revenue account using unearned revenue journal entry since Grant Film Productions has not yet earned the revenue. The table below illustrates how an accountant working at Grant Film Productions would journalize these revenue transactions.
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Table 1: Journalizing the revenue transactions
|
Debit |
Credit |
|
| Cash |
$10,000 |
|
| Unearned revenue (liability) |
$10,000 |
It should be noted that recording this revenue in December would result in an increase in the current ratio since the current liabilities would decrease in relation to current assets.
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
It is unethical to record the revenue transaction in December since this does not conform to the Generally Accepted Accounting Principles (GAAP). ‘Recognizing revenue before it is earned’ is the accounting principle that is relevant to this situation. Therefore, my conclusion is that if I were the owner of Grant Film Productions, I would not opt to record the revenue transaction in December. The reason for this is that it is not ethical according to GAAP, leave alone that doing so would not provide a true measure of the company’s ability to pay its obligations.
