t is stand accounting procedures, or GAAP, to make an adjusting entry to remove the current year�s principle from the long-term liabilities. This entry reduces the long-term liabilities and increases the current liabilities. You are the bookkeeper for Biker�s Business. Biker�s Business has a bank loan that requires a current ratio of 1.5 times. The owner has asked that you do not make the adjusting entry to take the current portion from the long-term liabilities. You know if you make the adjusting entry Biker�s Business� loan will need to be repaid immediately (or the loan called). What should you do?
As the bookkeeper for Biker's Business, you are faced with a dilemma. On one hand, GAAP requires you to make an adjusting entry to remove the current year's principle from the long-term liabilities. This entry would reduce the long-term liabilities and increase the current liabilities. On the other hand, the owner has asked you not to make this adjustment because it would trigger the immediate repayment of the loan.
To determine what you should do, you need to consider the requirements of GAAP as well as the loan agreement's current ratio requirement. GAAP is a set of standard accounting principles that guide financial reporting. It is important to follow these principles to ensure accurate and reliable financial statements.
In this case, the loan agreement specifically requires a current ratio of 1.5 times. The current ratio is calculated by dividing current assets by current liabilities. By not making the adjusting entry, the current liabilities will not reflect the current portion of the long-term loan, resulting in a higher current liability balance. This would decrease the current ratio, potentially violating the loan agreement's requirement.
Therefore, it is essential to follow GAAP and make the adjusting entry to properly reflect the current portion of the long-term loan in the current liabilities. By doing so, you would be adhering to the accounting standards and accurately representing the financial position of Biker's Business.
It is important to communicate the implications of the adjusting entry to the owner. You can explain that making the adjustment is necessary to comply with GAAP and maintain the loan agreement's requirements. If there are concerns about immediate loan repayment, you can suggest discussing the matter with the lender to explore alternative solutions, such as renegotiating the loan terms or extending the repayment schedule.
Ultimately, the decision should be made in consultation with the owner and potentially involve legal or financial advisors to ensure compliance with both GAAP and the loan agreement while managing the owner's concerns about loan repayment.