Nancy Bowles, the owner of Bowles Services, a sole proprietorship, rushed into the office late Monday morning carrying a deposit receipt from the bank. Upon handing the receipt to Sarah, the accountant, she instructed her to debit Cash and credit Professional Fees for the full $10,000. When Sarah examined the source document, she saw that the cash had come from the account of Richard Bowles, Nancy’s father. Nancy explained to Sarah that she was applying for a bank loan and needed to “show that her company earned more year-to-date income than it actually had.” Nancy used the rationale that the company would earn at least $10,000 in revenue during the next few months but the financial statements the bank required were as of the end of this month.

1. Does Nancy’s explanation make sense? Is it ethical?

2. How should this transaction be entered in Bowles Services’ books? Does it matter whether the modified cash basis or accrual basis of accounting is used?

3. Make a written list of all the consequences Nancy might face as a result of recording this transaction as a debit to Cash and a credit to Professional Fees.