Imagine you are the assistant controller in charge of general ledger accounting at Linbarger Company. Your...

Imagine you are the assistant controller in charge of general ledger accounting at Linbarger Company. Your company has a large loan from an insurance company. The loan agreement requires that the company’s cash account balance be maintained at $200,000 or more, as reported monthly. At June 30, the cash balance is $80,000. You give this update to Lisa Infante, the financial vice president. Lisa is nervous and instructs you to keep the cash receipts book open for one additional day for purposes of the June 30 report to the insurance company. Lisa says, “If we don’t get that cash balance over $200,000, we’ll default on our loan agreement. They could close us down, put us all out of our jobs!” Lisa continues, “I talked to Oconto Distributors (one of Linbarger’s largest customers) this morning. They said they sent us a check for $150,000 yesterday. We should receive it tomorrow. If we include just that one check in our cash balance, we’ll be in the clear. It’s in the mail!”

Questions

What is the accounting problem that the Linbarger Company faces?

What are the ethical considerations in this case? Provide rationale for why these are ethical considerations.

What are the negative impacts that can happen if you do not follow Lisa Infante’s instructions to wait one more day to post the balance?

Who will be negatively impacted if you do comply? Provide a rationale for why these individuals will be impacted.

What is one alternative that you could pursue in this scenario? Support your recommendations with information you learned in this class.

Solutions

Expert Solution

1) The Linbarger company is facing an accounting problem according to which
as per loan agreement with Insurance company. The company's cash account
on June 30 is showing a short balance of $80000. This short balance could cancel
loan agreement and put them out of jobs.


2) The ethical considerations are :
a) The company ethically has to maintain cash balance at the month end of $200000.
This is because of agreement with Insurance company.

b) The book has to be closed down on the last day of the month principlely.
This is because of accounting principles.


3) The negative impact if one more day books are not kept open is that
the loan agreement makes the company a defaulter and they would
lose their jobs.


4) The cashier and the finance controller will be persons who gets
impacted because they are the immediate incharge of the job
which is placed through the Loan agreement to maintain a cash balance of
$200000 at the month end.


5) The alternative which the finance controller can have in this situation are:
Have a short term loan, for 2 days on June 30 and pay off as soon as
distributor's check get cleared on July 1.

ekkarill92 answered 1 year ago

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