Question

Chris P. Bacon is the chief accountant for CV Industries, a large manufacturing company. In addition to its normal business activities, the company has excess warehouse space that it rents out to local businesses. Because the typical renter is a small business, CV Industries requires renters to make lease payments for the entire rental period on the day the lease is signed. As a result, CV Industries typically reports a large unearned rent balance on its balance sheet. After making adjusting entries for the current year, Chris prepares the adjusted trial balance and notices that the company’s earnings will decline significantly. He presents the adjusted trial balance to the company’s CFO, Antonio Beldin, who is concerned about the earnings decline. Mr. Beldin notices the large unearned rent balance and proposes making an additional end-of- period adjusting entry to recognize the entire unearned rent balance as revenue in the current period. Chris protests, reminding Mr. Beldin that the adjusting entry for unearned rent has already been made. Mr. Beldin assures Chris that his proposal is acceptable, reminding Chris that “because we have already received the cash, we have the right to recognize the revenue in the current period.” He instructs Chris to make the additional adjusting journal entry. Chris is hesitant to follow these instructions, but he is sensitive to the company’s emphasis on earnings growth and makes the adjusting entry as instructed.

Is Chris behaving ethically? Why?

Who is affected by Chris’s decision?

Answer 1

The behaviour of Chris is not ethical as they have not followed the requisite standards and GAAP. The unearned rent must not be booked as income as they follow accrual system of accounting and not cash basis of accounting. Even, as per the applicable standards and principles, the unearned rent should not be recogined as the income for current year. Though the amount is received, it would be accounted as advance received but not to be accounted as income received. Because of this, the financial statements does not show true profit or loss and financial position of the organisation. Hence, it is not ethical to pass adjustment entry and account for unearned rent as income so as to increase the profit of the organisation.

The organisation as a whole and mainly the investors are effected by Chris's decision. Since, investors believe in organisation's fianancial statements, overstatement of profit would definitely effect their decision for making investment in the organisation.