It is standard procedures, or GAAP, to make an adjusting entry to remove the current year's principle from the long-term 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 no 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?
There's only one ethically permissible answer.
What do you think it is?
As the bookkeeper for Biker's business, you are faced with a decision regarding adjusting entries to remove the current portion of a long-term liability. In this case, not making the adjusting entry would result in the loan being called or requiring immediate repayment. However, adhering to GAAP, which is the set of accounting principles and standards, is crucial for accurate financial reporting.
To determine the appropriate course of action, you need to consider the following steps:
1. Review the loan agreement: Examine the terms of the loan agreement to understand the specific requirements regarding the current ratio and any provisions related to adjusting entries.
2. Calculate the current ratio: Determine the current ratio of Biker's business by dividing its current assets by its current liabilities. If the current ratio is below 1.5 times, it means that Biker's business does not meet the bank loan's requirement.
3. Assess the financial impact: Consider the consequences of not making the adjusting entry on the financial statements. This may affect the accuracy of the financial statements and the ability to comply with GAAP.
4. Communicate with the owner: Discuss the situation with Biker's business owner and explain the potential risks and implications of not making the adjusting entry. Emphasize the importance of adhering to GAAP and the potential consequences of non-compliance with the loan agreement.
5. Seek professional advice: If needed, consult with a certified public accountant (CPA) or financial advisor to get their perspective on the matter and any possible alternatives.
Ultimately, the decision should be made based on careful consideration of the loan agreement, financial implications, and the importance of accurate financial reporting. It is recommended to follow GAAP guidelines unless there is a valid and justifiable reason for deviating from them.