State whether it is ethical to record the revenue transaction in December. Identify the accounting… 1 answer below »

Cross Timbers Energy Co. is in its third year of operations, and the company has grown. To expand the business, Cross Timbers borrowed $1 million from Bank of Fort Worth. As a condition for making this loan, the bank required that Cross Timbers maintain a current ratio of at least 1.50 and a debt ratio of no more than 0.50. Business recently has been worse than expected. Expenses have brought the current ratio down to 1.47 and the debt ratio up to 0.51 at December 15. Lane Collins, the general manager, is considering the result of reporting this current ratio to the bank. Collins is considering recording this year some revenue on account that Cross Timbers will earn next year. The contract for this job has been signed, and Cross Timbers will deliver the natural gas during January of next year.

Required

1. Journalize the revenue transaction, and indicate how recording this revenue in December would affect the current ratio and the debt ratio.

2. State whether it is ethical to record the revenue transaction in December. Identify the accounting principle relevant to this situation.

3. Propose for Cross Timbers a course of action that is ethical.

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