In order to continue to qualify for low-cost government-provided financing, your company must maintain a debt-to-equity ratio of less than 3 to 1 at the end of each calendar quarter.
When you recently noticed that the company's debts are too high to achieve the required debt-to-equity ratio, your boss, the CFO, told you to contact "Friendly Freddy" at your local bank. According to "Friendly Freddy," at the end of each quarter, the bank takes legal ownership of your company's $4 million fleet of trucks and cancels the $4 million Note Payable owed to it. This removes the bank debt from your company's books and shrinks the debt-to-equity ratio to acceptable levels. Then, as the new quarter begins, the bank restores your ownership of the trucks and reinstates your debt. As your CFO puts it, "We temporarily get rid of the debt and the trucks from our books each quarter...without ever having to move the parked trucks even one inch!"
According to the Code of Conduct, this practice is:
a. Acceptable because the bank legitimately cancels the debt owed by your company
b. Acceptable because quarterly financial statements are subject to more lax rules than annual financial statements
c. Unacceptable because your company's intent is to mislead government lending sources
d. Unacceptable, unless $4 million is immaterial relative to the size of the company's total debts?