1. Business
  2. Accounting
  3. revenue recognition sparrow film productions spf wished to expand its...

Question: revenue recognition sparrow film productions spf wished to expand its...

Question details

Revenue Recognition: Sparrow Film Productions (SPF) wished to expand its production facilities so it borrowed $10,000,000 from First National Bank early in 2018. As a condition of making this loan, the bank requires that the business maintain a current ratio of at least 2 to 1. Business has been pretty good in 2018, but the cost of the expansion has brought the current ratio down below the target. In fact, on December 15, Jack Sparrow, the owner of SPF estimates that the year-end current ratio will be only 1.90 to 1. (A little short of the bank's requirements.) Jerry quickly looks through the signed contracts and sees an unpcoming project that will be started and completed in February 2019 for $500,000. Jerry is thinking about recording the $500,000 as revenue in 2018 instead of in 2019. If he does this, the current ratio at the end of 2018 will be above the required current ratio of 2 to 1. Required: 1. Assume Jerry decides to include the $500,000 as 2018 revenue. Journalize the transaction on 12/31 assuming the cash will be collected in February of 2019. 2. Explain why it would be unethical for Jerry to record the February revenue in 2018. Identify the accounting principle(s) relevant to this situation and give the reasons for your conclusion. This part should be 3-4 sentences. 3. Cite all references used including url or page number (even if you use the textbook). 4. If you were advising Jerry, what else could Jerry do to improve his current ratio that would be acceptable under ethical standards? (2-3 sentences)

Solution by an expert tutor
Blurred Solution
This question has been solved
Subscribe to see this solution