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In: Accounting

Health Corporation has several notes receivable reported as current assets on its year-end balance sheet. While...

Health Corporation has several notes receivable reported as current assets on its year-end balance sheet. While collection seems certain, it may be delayed beyond one year. Because of this, Jerome, the controller wants to reclassify these notes as non-current. Health’s treasurer, Amanda also thinks that collection will be delayed but does not favor reclassification because this will reduce the current ration from 1.5:1 to 0.8:1. This reduction in current ratio is detrimental to company prospects for securing a major loan. Instructions: 1. Identify and describe more than one ethical perspective in resolving the identified dilemma. 2. Clarify the advantages and disadvantages of implementing each ethical perspective. 3. Determine and support a proposed solution.

Solutions

Expert Solution

1. Here the ethical dilema is whether to reclassify the notes receivable to Non- Current asset or not and whether to obtain the loan by providing misleading information to the lender.

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2.If the notes are not classified, the current ratio will remain high enough to secure the major loan. Health Corporation benefits, but the lending agency may be misled about the financial state of the company and its potential to meet the conditions of its loan.

-If Notes are classified as non current then the company may not be able to obtain the loan which is determental to the company interest.

-Because both the controller and the treasurer recognize that delay of the collection has an impact on the conflicting economic interests of Health and its lending agency, the decision to reclassify has ethical dimensions.

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3.The controller should reclassify the notes from current notes receivable to noncurrent notes receivable. Because current assets are defined as assets that will be consumed or generate cash within one year, notes which cannot be collected within one year should be classified as non current investments.

-If the treasurer insists that the notes not be re-classified, the controller will have to decide whether to accept the treasurer’s decision, speak with higher level executives at Health, or take some other action. Other actions mayinclude speaking to the audit committee, or to the chairman of the board of directors.

ekkarill92 answered 2 years ago
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