Kafue Company has faced a challenging year due to increased competition. Kafue has a year-end of 30
Question:
Kafue Company has faced a challenging year due to increased competition. Kafue has a year-end of 30 September 2020. The draft financial statements report an operating loss. In addition to this, debt covenant limits based on gearing are close to being breached and the company is approaching its overdraft limit. On 27 September 2020, Kafue’s finance director asked the accountant to record a cash advance of K3m received from a customer, Buddy Company, as a reduction in trade receivables.
Buddy Co is solely owned by Kafue’s finance director. The accountant has seen an agreement signed by both companies stating that the K3m will be repaid to Buddy in four months’ time. The finance director argues that the proposed accounting treatment is acceptable because the payment has been made in advance in case Buddy wishes to order goods in the next four months. However, the accountant has seen no evidence of any intent from Buddy to place orders with Kafue. The accountant has been in her position for only a few months and the finance director has recently commented that ‘all these accounting treatments must be made exactly as I have suggested ensuring the growth of the business and the security of all our jobs’. Both finance directors and accountants are qualified accountants.
Required
Discuss the ethical issues and accounting issues arising from the scenario, including any actions that the accountant should take to resolve the issue.
Intermediate Accounting Volume 2
ISBN: 9781119497042
12th Canadian Edition
Authors: Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, Irene M. Wiecek, Bruce J. McConomy