It is standard accounting procedure, or a generally accepted accounting principle (GAAP), to make a journal...

It is standard accounting procedure, or a generally accepted accounting principle (GAAP), to make a journal entry to remove the current year's principle from the long-term liabilities. This entry reduces the long-term liabilities and increases the current liabilities. Your company has a bank loan that requires a current ratio of 1.5 times. The owner has asked you, the bookkeeper, not to make the adjusting entry that would take the current portion from the long-term liabilities. If you make the adjusting entry, the company's loan will need to be repaid immediately (or the loan called). What should you do?

Answer in a 100 words or more.

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Expert Solution

Answer:

You ought to pursue the GAAP (sound accounting guidelines) and do the correct altering passage. You may recommend the proprietor look for changed types of financing that would not require maintenance of a 1.5 current proportion.

Also, you can offer to meet with the investor and endeavor to acquire a waiver of the present proportion, current proportion necessity for the present time frame.

I would pursue the standard bookkeeping strategy or GAAP and pass the changing passage and the current segment of the advance. This can be clarified by talking the precedent.

Assume before making any installment biker's business has current resources $200,000 and current liabilities $100,000. Before paying any current bit of the credit current proportion is

Current proportion = Current proportion/Current liabilities

= $350,000/$250,000

= 1.4 times

Assume the current bit of the long haul liabilities is $50,000. When he reimburses the current part of the credit will lessen both the present resources and current liabilities as current segment of the advance will be paid in real money. Subsequent to paying the current part of the credit then its present proportion will wind up equivalent to

Current proportion = Current proportion/Current liabilities

= $350,000-$50,000/$250,000-$50,000

= $300,000/$200,000

= 1.5 times

Consequently, in the wake of paying the current bit of the advance the present proportion has expanded from 1.4 times to 1.5 times as required bvy the bank. Therefore, proprietor isn't right and he should pass the changing section for reimbursing the current segment of the credit.

ekkarill92 answered 1 year ago

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