ARAS Inc. is in its third year of operations and the company has grown. To expand the business, ARAS borrowed $1 million from Royal Bank of Canada. As a condition for making this loan, the bank required that ARAS maintain a current ratio of at least 1.50 and a debt ratio of no more than 0.50.
Business recently has been worse than expected. Expenses have brought the current ratio down to 1.47 and the debt ratio up to 0.51 at December 15. Shane Rollins, the general manager, is considering the implication of reporting this current ratio to the bank.
Rollins is considering recording this year some revenue on account that ARAS will earn next year. The contract for this job has been signed, and ARAS will perform the service during January.
Requirements
1. Journalize the revenue transaction, omitting amounts, and indicate how recording this revenue in December would affect the current ratio and the debt ratio.
2. State whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation.
3. Propose to ARAS a course of action that is ethical?