Ethics Case #$2$

This ethics case will give you some experience reading the related ASC in the FASB Codification and then using that information to evaluate a situation.$$

Begin by reading the case below.

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The Case:

In December, Mr$.$ Wilson, the controller of Fargo company, a calendar fiscal$-$year company, is faced with a tough situation.$$ The bond indenture of a major issue of Fargo bonds requires maintaining a $3-$to$-1$ current ratio as measured at each balance sheet date.$$ Fargo has recently experienced cash shortages caused by a downturn in the general economy and in the demand for Fargo$$s products.

A substantial account payable is due in January. Fargo does not have the cash to pay the debt before the end of the current year. Furthermore the January cash budget based on a realistic estimate of sales and collections from accounts receivable indicates a cash shortage requiring short term financing. The payable due in January is large enough to cause the current ratio at December $31$st to fall below $3\mathrm{.}0.$ The controller begins the search for a financial institution willing to refinance the payable on a long term basis. If successful, the payable would be reclassified as long term enabling Fargo to comply with the bond indenture. Several financial institutions are willing to refinance the payable, but none agreed to do so on a non$-$cancellable basis.

The controller is quite stressed by the situation. Noncompliance with the bond indenture may lead to technical default. If the bondholders exercise their right and call the bonds Fargo may be forced into bankruptcy. The controller is confident that Fargo will rebound in the coming year and reasons that more harm will come to the company, its employees, and its shareholders if he does not take action that will result in compliance with the bond indenture. Mr$.$ Wilson, therefore, decides to refinance the payable on a long$-$term basis and to report the payable as a long$-$term liability on the balance sheet.

Go to the Accounting Standards Codification and carefully review ASC $470-10-45-12$A $20$

Think about the case and the ASC you$$ve just read. What did the controller do wrong, if anything?$$