The timing of adjusting entries can alter the analysis of a company. As the full-charge bookkeeper,...

The timing of adjusting entries can alter the analysis of a company. As the full-charge bookkeeper, it is your job to ensure that the adjusting entries are entered on a timely basis. You have noticed that the adjusting entry to transfer the current year’s portion from mortgage payable – long term to mortgage payable – current has not been entered. You mention it to your controller and are told not to record this adjusting entry. The company is applying for a loan from the bank and the controller found out that the loan officer looks only at the current assets and current liabilities. You are further told that if anyone questions the lack of the adjusting entry to apologize for the error and record it immediately. Is this ethical for you and the company’s controller? Provide justification for your decision. Additionally, please incorporate some of the following questions by Professor Lemoine.

Professor's Discussion Points

Beyond the ethical questions, might this raise additional problems? Why or why not?

From a balance sheet perspective, what might be "off" as a result of not recording this entry?

What financial ratios (please cite) may be incorrect as a result of not recording the entry?

Expert Solution

It is not ethical for the bookkeeper or the controller, to not to record the adjusting entry. It is not an error or mistake, the controller is doing it intentionally to mislead the loan officer to get a loan based on less amount of current liabilities. It is completely unethical.

Beyond the ethical issue, it might raise additional problems as the company will have higher amount of long term liabilities. Additionally, it will affect the cash flow analysis as the current portion will not be reflected in that.

From the balance sheet perspective, Current liability portion of the mortgage payable might be "off" as a result of not recording this entry

Following financial ratios may be incorrect as a result of not recording the entry:

Liquity ratios will be incorrect as it calculate the cash available to pay debt. In this ratio, current liabilities is used.

Debt ratios will be incorrect. It is used to quantify the company's ability to pay its long term debt.

ekkarill92 answered 1 year ago

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