The timing of adjusting entries can alter the analysis of a company. As the full
ID: 2437121 • Letter: T
Question
The timing of adjusting entries can alter the analysis of a company. As the full-charge bookkeeper, it is your job to ensure that the adjusting entries are entered on a timely basis. You have noticed that the adjusting entry to transfer the current year’s portion from mortgage payable – long term to mortgage payable – current has not been entered. You mention it to your controller and are told not to record this adjusting entry. The company is applying for a loan from the bank and the controller found out that the loan officer looks only at the current assets and current liabilities. You are further told that if anyone questions the lack of the adjusting entry to apologize for the error and record it immediately. Is this ethical for you and the company’s controller? Provide justification for your decision.
Additionally, please incorporate some of the following questions: Beyond the ethical questions, might this raise additional problems ? Why or why not? From a balance sheet perspective, what might be "off" as a result of not recording this entry? What financial ratios (please cite) may be incorrect as a result of not recording the entry?
Explanation / Answer
The action of not recording the adjusting entry on time is unethical for both me and the companys controlller. It is concealing of important facts from a potential creditor and is a misrepresenation of the company's financial affairs.
This might raise the problem of inconsistency in the financial statements as every year a portion of mortgage payable is being transferred to the current portion. From a balance sheet perspective, both the long term liabilities and the current liabilities will be "off" as a result of not recording this entry. The current ratio and the long term debt to asset ratio will be incorrect as a result of not recording this entry.
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