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Grant Film Productions wishes to expand 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 1.50. Business has been good but not great. Expansion costs have brought the current ratio down to 1.40 on December 15. Rita Grant, the owner of the business, is considering what might happen if she reports a current ratio of 1.40 to the bank. One course of action for Grant is to record in December $10,000 of revenue that the business will earn in January of next year. The contract for this job has been signed. Requirements Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio. 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.

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The journal entry to record this "earned revenue" is:

Dr Accounts receivable 10,000

    Cr Service revenue 10,000

This will increase current assets, which in turn will increase the company's current ratio.

This is not ethical and goes against the accrual principal, conservatism principle and revenue recognition principle.

The accrual principle states that transactions should be recorded when thy actually occur. Conservatism principle states that costs must be recorded as soon as a company can quantify and identify them, but revenues should only be recorded when the earning process takes place. The revenue recognition principle states that revenues must be only recorded when the earning process is complete or has been substantially completed.

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