RWP$8-6($Algo$)$ Ethics Case Identify the impact: Does Eugene's decision have an effect on First Federal Bank?

Identify the impact: Does Eugene's decision have an effect on First Federal Bank? Make a decision: Should Eugene record the $$1$ million as service revenue?

Make a decision: Should Eugene record the $$1$ million as service revenue?

Eugene Wright is CFO of Caribbean Cruise Lines. The company offers luxury cruises. It's near year$-$end, and Eugene is feeling kind of

queasy. The economy is in a recession, and demand for luxury cruises is way down. Eugene doesn't want the company's current ratio

to fall below the $1\mathrm{.}0$ minimum stated in its debt covenant with First Federal Bank. If the company reports a current ratio below $1\mathrm{.}0$ at

year$-$end, First Federal may require immediate repayment of its $$8$ million loan, which is not due for another two years.

At the end of the year, Caribbean Cruise Lines reports current assets of $$11\mathrm{.}3$ million and current liabilities of $$11\mathrm{.}2$ million. These

amounts include advanced payments of $$1$ million from customers in December for cruises to be provided the following summer.

Instead of treating the $$1$ million as deferred revenue, Eugene decided to count the cash received as revenue. He reasoned that cash

has already been collected, and the company has a long history of providing cruises, so customers will be provided their cruise as

scheduled, and the company will have cash to pay the bank in the future.

Required:

Understand the reporting effect: How does Eugene's decision affect the reported amount of current assets and current liabilities at

the end of December?

Specify the options: Calculate the current ratio assuming the $$1$ million is treated as $($a$)$ service revenue or $($b$)$ deferred revenue.

Identify the impact: Does Eugene's decision have an effect on First Federal Bank?

Make a decision: Should Eugene record the $$1$ million as service revenue?

Complete this question by entering your answers in the tabs below.

Understand the reporting effect: How does Eugene's decision affect the reported amount of current assets and current liabilities at the end of

December?

Understand the reporting effect: How does Eugene's decision affect

the reported amount of current assets and current liabilities at the end

of December?