Question
Please write your personal thought 100~150 words for each question. This is an ethics challenge from Chapter 9, page 485. Therefore, in your responses you
Please write your personal thought 100~150 words for each question.
This is an ethics challenge from Chapter 9, page 485. Therefore, in your responses you should be considering how actions / decisions affect amounts reported in the Financial Statements. You can refer to your textbook, page 24-25 An Ethical Foundation.
AP9-5 Ethics Case p485:
The Tony Hawk Skate Park was built in early 2021. The construction was financed by a $3,000,000, 7% note due in 6 years, with payments of $51,147 required each month. The first year has not been as profitable as hoped. The discussion at the executive board meeting at the end of 2021 focused on the potential need to obtain additional financing. However, board members are concerned that the company's debt level at the end of 2021 will make the company appear too risky to additional lenders. The balance of the note at the end of 2021 is $2,583,026. By the end of 2022, the 12 monthly payments will reduce the balance by an additional $447,116. Separate from the note, the company has the following amounts at the end of 2021: current assets of $3,100,000; current liabilities of $2,700,000; total equity of $4,000,000.
Jim Trost, the VP of finance, tells board members that he plans to classify the full balance of the note at the end of 2021 as long-term because the full length of the note is six years. He explains that lenders will be more willing to let the company borrow and will offer a lower interest rate if the company reports fewer current liabilities. Plus, he plans to tell lenders that there is no problem with long-term solvency because the company long-term profits will be used to pay its long-term debt.
- Identify the impact: Can Jims decision affect lenders?
- Make a decision: Should Jim record the full balance of the note as a long-term liability in its balance sheet as of December 31, 2021?
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