Respond to fellow students post. Must be 150 words. Cite your sources

Topic:

Grant Film Productions wishes to expand and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.50.

Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 on December 15. Rita Grant, owner of the business, is considering what might happen if she reports a current ratio of 1.40 to the bank. One course of action for Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed.

Requirements

1. Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio.
2. Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation, and give the reasons underlying your conclusion.

Instructions:Your initial response should be no less than 250 words with at least one scholarly journal reference (dictionary-type websites are excluded). Reply to at least two of your classmates. Replies to classmates should be a minimum of 100 words and include direct questions. In-text citations and references must be in APA format. Refer to the Forum Grading Rubric below for additional guidelines.

Initial Post Due:Wednesday by 11:55 pm ET Replies to Classmates Due:Sunday by 11:55 pm ET

Make sure you are using credible sources in your discussions and assignments. Scholarly journals are the preferred source of credible/quality references. These consist of peer-reviewed articles published in academic journals related to the field, which are found via our Library. Websites such as Investopedia, ask.com, answers.com, or dictionary-type of websites limit the insight to the topics. Wikipedia is not acceptable as it is not a reliable, credible source of reference. The purpose is to bring in new information and how does it apply to our topic from a real-world perspective, instead of extending on definitions that are found in the book.

More information what a credible source consists of can be found here: http://writingcommons.org/evidence/supporting-sources/630-what-might-be-a-more-credible-reliable-source.

Students post:

The recording of this transaction would increase the cash in the business, it would only have minimal difference in the current ratio of the company. It would still be under the bank required 1.50 ratio for the loan. The company should never expand if the necessary liquid assets arent there to do so, it could only lead to financial hardships in the long run. If you take the equation: Current Ratio=Current Assets/Current Liabilities. The ratio is 1.40= x/ 100000. Even by adding the money to Decembers revenue/cash accounts, it doesnt meet the 1.50 stipulation.

Debit Credit

Cash 10000

Service Rev 10000

Cash received for service

I dont think that it is ethical at all, but it probably does happen in the business world. If you are able to count profits to a certain period of time and label them as such, many would not catch it. The business received the cash for the account and recorded it as such, which is cash basis accounting (p 134). The principle that is relevant is the revenue recognition principle. When should the revenue be recorded as such and the answer would be, when the work is completed for the money. That is what the principle states, revenue recognition requires companies to record revenue when it has been earned, but not before (p. 137).

Nobles, T., Mattison, B., & Matsumura, E. M. (2014).Horngren's Accounting(Tenth ed.). Saddle River, NJ: Pearson Education.

Your response: