Happy Trails, Inc., is a popular family resort just outside Yellowstone National Park. Summer is the resort’s busy season, but guests typically pay a deposit at least six months in advance to guarantee their reservations.

The resort is currently seeking new investment capital in order to expand operations. The more profitable Happy Trails appears to be, the more interest it will generate from potential investors. Ed Grimm, an accountant employed by the resort, has been asked by his boss to include $2 million of unearned guest deposits in the computation of income for the current year. Ed explained to his boss that because these deposits had not yet been earned they should be reported in the balance sheet as liabilities, not in the income statement as revenue. Ed argued that reporting guest deposits as revenue would inflate the current year’s income and may mislead investors.

Ed’s boss then demanded that he include $2 million of unearned guest deposits in the computation of income or be fired. He then told Ed in an assuring tone, “Ed, you will never be held responsible for misleading potential investors because you are just following my orders.”

Instructions

Should Ed Grimm be forced to knowingly overstate the resort’s income in order to retain his job? 

Is Ed’s boss correct in saying that Ed cannot be held responsible for misleading potential investors? Discuss.

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