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:
- 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.
- 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.
- 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.
- 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.