It is February 16, 2011 and you are auditing the Davenport Corporation’s financial statements for 2010 (which will be issued in March 2011). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenport’s accounts receivable is $50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss for 2010 might be appropriate. Jim replies, “Why should we make an adjustment? Ted Travis, the president of Travis Corporation, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2011, so let’s wait and see what happens; we can always make an adjustment later this year. Our 2010 income and year-end working capital are not that high; our creditors and stockholders wouldn’t stand for lower amounts than they already are.”

From financial reporting and ethical perspectives, prepare a response to Jim Davenport regarding this issue.

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