The Farm Credit System is the nation’s largest lender to farmers. In the fourth quarter of 1987 it posted a profit of $179 million, avoiding a loss by using an unusual accounting technique. As reported in The Wall Street Journal, “the System would have posted a fourth-quarter loss of about $43 million had it not taken $222 million out of its reserve for loan losses [Allowance for Doubtful Accounts] .... The System began that practice in the 1987 second quarter, as fed¬ eral subsidy payments buoyed the farm economy and problem loans declined. The practice is highly unusual, though not a violation of generally accepted accounting principles.” Source: Jeff Bailey, “Farm Credit Posts 4th-Quarter Profit, Reflecting Unusual Accounting Method,” The Wall Street Journal, February 19, 1988, p. 40. REQUIRED:

a. Prepare the journal entry recorded by the Farm Credit System described above. Explain why such an entry was described as “highly unusual.” Chapter 6 The Current Asset Classification, Cash, and Accounts Receivable 309 C6-6 (Revenue recognition, ethics, and reputation) C6-7 (Appendix 6A: Nonperforming loans, write-offs, and outstanding debt) C6-8 (Appendix 6B: Accounting forforeign currencies: an economic consequence)

b. Explain how subsidy payments from the U.S. government to farmers would allow the Farm Credit System to justify such an accounting practice.

c. The article goes on to report that “The System’s auditor, Price Waterhouse, . . . qualified its opinion of the System’s financial statements . . . The qualification for the 1987 books is based on uncertainties of parts of the 1987 federal bailout being implemented.” Why would Price Waterhouse qualify the System’s financial statements due to uncertainties over the federal subsidy payments?