It 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 responsible for following standard accounting procedures, including adhering to generally accepted accounting principles (GAAP). According to GAAP, it is necessary to make an adjusting entry to remove the current year's principal from long-term liabilities. This entry reduces the long-term liabilities and increases the current liabilities.
However, the owner of Biker's Business has requested that you do not make the adjusting entry to take the current portion from the long-term liabilities. It's important to note that deviating from GAAP practices may have consequences, such as affecting the loan terms or potentially calling the loan for immediate repayment.
In this situation, you should communicate the potential implications to the owner so they have a clear understanding of the risks associated with not making the adjusting entry. By discussing the matter, you can engage in a dialogue about the possible consequences and explore alternative options that align with both the owner's preferences and your responsibility to adhere to GAAP.
Ultimately, it is essential to balance the owner's wishes with the need to follow accounting standards. Open communication and consultation with the owner and possibly a financial advisor can help reach a decision that best protects the interests of Biker's Business while also satisfying the owner's requirements.