J’s Wedding Productions wishes to expand. Suppose the company has borrowed $200,000 from The Bank of East Asia. As a condition for making this loan, the bank requires that the business should maintain...

J’s Wedding Productions wishes to expand. Suppose the company has borrowed $200,000 from The Bank of East Asia. As a condition for making this loan, the bank requires that the business should maintain a current ratio of at least 1.50. The market has become increasingly competitive in the current year. Increases in promotional expenses have cut the profit margin remarkably. At the year-end date, preliminary analysis of the adjusted trial balance indicates a current ratio of 1.40. In order not to breach the loan’s condition, the Chief Financial Officer (CFO) refrains from making certain adjusting entries, like the accrued salary payable and the supplies used during the year.

Requirements

1. Explain how the withdrawal of certain adjusting entries would lead to improvement in current ratio.

 2. Is it ethical for the CFO to skip certain adjusting entries in order to conform to the loan’s condition? Identify the relevant accounting principles to justify your answers.