Discount Hardware wishes to expand its business and has borrowed $200,000 from the Royal Bank. As a condition for making this loan, the bank required Discount Hardware to maintain a current ratio of at least 1.50 and a debt ratio of no more than 0.50 and to submit annual financial statements to the bank.
Business during the third year has been good but not great. Expansion costs have brought the current ratio down to 1.40 and the debt ratio up to 0.51 at December 15. The managers of Discount Hardware are considering the implication of reporting this current ratio to the Royal Bank. One course of action that the managers are considering is to record in December of the third year some revenue on account that Discount Hardware will earn in January of next year. The contract for this job has been signed, and Discount Hardware will deliver the materials during January.
Required
1. Journalize the revenue transaction using your own numbers, and indicate how recording this revenue in December would affect the current ratio and the debt ratio.
2. State whether it is ethical to record the revenue transaction in December. Identify the accounting criteria relevant to this situation.
3. Propose an ethical course of action for Discount Hardware.