Issue 1. Cross Timbers Energy Co. is in its third year of operations, and the company has grown to be the major producer of compressed natural gas (CNG) in the region. To expand the business, Cross Timbers borrowed $15 million from Bank of Fort Worth. As a condition for making this loan, the bank required that Cross Timbers maintain a net profit of at least $5 million per year.

Business recently has been worse than expected. Lower revenue and higher expenses have brought net profit down to $4.5 million at December 27. Lane Collins, the general manager, is considering what would happen when the bank receives reports of its lower than required profit. Collins is considering the $3 million deferred income that’s sitting on his Balance Sheet.

It represents cash collected ahead of delivery of CNG next month. He told himself, “This money is as good as earned, I have the money in the bank account, I can deliver the goods anytime, so why did the accountant insist that they must be shown as a liability? I think I will just say I have earned $1 million by the end of the year and everyone will be happy.”

Requirements 1. Journalize the revenue transaction, and indicate how recording this revenue in December would affect the company’s net profit.

2. Analyze this transaction according to the decision framework for making ethical judgments

(in Chapter 1):

a. What is the issue?

b. Who are the stakeholders and what are the alternatives? Weigh them from the standpoint of economic, legal, and ethical implications.

c. What decision would you make?

3. Propose for Cross Timbers a course of action that is ethical.