Salem would like to expand his business and has borrowed $100,000. As a condition for making this loan, the bank requires that the business maintain a current ratio of at least 1.5.
The expansion costs have brought the current ratio to 1.4 on Dec. 15. To avoid this decrease in current ratio Salem record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been sign.
1- Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio.
2- Discuss whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation, and give the reasons underlying your conclusion.