financial reporting 3

400 Words


Mr. Fraud, CEO of Reliable Inc., is very concerned. The company was going to record a loss for a second year in a row. He called his controller, Mr. Ethics, to his office and said, “We have a problem! Reliable Inc. is showing a loss for a second year in a row. I have to do something about it!” Mr. Fraud continues to give the following instructions to Mr. Ethics:

  1. The land we purchased for $20,000 is appraised at $30,000, but I think the fair value is $50,000. Right now, we need to enhance our assets, so go ahead and make an entry to record the land at $50,000. Next year, we can make the adjustment, if necessary.
  2. Reverse the bad debt from our customer, Mr. Bankrupt, for $20,000. We will ignore the news about his company in the market and how it is in trouble. That should give us $20,000 worth of income and should enhance our receivables.
  3. We have unearned revenue on our books for $30,000. Go ahead and record that unearned revenue as service revenue. That will increase our sales.
  4. With the increased sales and better assets, we will be able to get the bank loan we need to buy the equipment.

You are a CPA and a close friend of Mr. Ethics; he looks very concerned. You ask him what the problem is. Mr. Ethics explains to you what he is being asked to do. Discuss the following with him:

  • What is the fundamental ethical issue in this case?
  • Identify each GAAP concept or principle that is violated in each recommended action.
  • Give him advice on what he can do.
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