Chris P. Bacon is the chief accountant for CV Industries, a large manufacturing company. In addition to its normal business activities, the company has excess warehouse space that it rents out to local businesses. Because the typical renter is a small business, CV Industries requires renters to make lease payments for the entire rental period on the day the lease is signed. As a result, CV Industries typically reports a large unearned rent balance on its balance sheet. After making adjusting entries for the current year, Chris prepares the adjusted trial balance and notices that the company’s earnings will decline significantly. He presents the adjusted trial balance to the company’s CFO, Antonio Beldin, who is concerned about the earnings decline. Mr. Beldin notices the large unearned rent balance and proposes making an additional end-of- period adjusting entry to recognize the entire unearned rent balance as revenue in the current period. Chris protests, reminding Mr. Beldin that the adjusting entry for unearned rent has already been made. Mr. Beldin assures Chris that his proposal is acceptable, reminding Chris that "because we have already received the cash, we have the right to recognize the revenue in the current period." He instructs Chris to make the additional adjusting journal entry. Chris is hesitant to follow these instructions, but he is sensitive to the company’s emphasis on earnings growth and makes the adjusting entry as instructed. Is Chris behaving ethically? Why?Who is affected by Chris’s decision?

Based on the information given, it can be deduced that the behavior of Chris is not ethical.

In this case, the company has not followed the requisite standards and GAAP. It should be noted that the unearned rent must not be booked as income.

Even though the amount is received, then it would be accounted as advance received. Due to this, the financial statements give a false financial position.  Lastly, the organization and the investors are affected by Chris's decision.

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CV Industries

1. Chris is not behaving ethically if he follows through with Mr. Berdin's instructions to make the additional adjusting journal entry.  This adjustment will result to smoothening the revenue by using the unearned rent revenue.

2. This unethical practice does not comply with IFRS 15, Revenue from Contracts with Customers, which is harmonized with US GAAP.  This requires that revenue be recognized for actual performance of contract obligations.

3. The stockholders will be misled by Chris' decision.  Creditors, potential investors, and other users of financial reports will also be misled when the revenue for the future periods are recognized in the current period.

Explanation:

Revenue should be recognized when the performance obligation relating to the revenue has been fulfilled.  And in accordance with the accrual concept and matching principle of generally accepted accounting principles, only revenue relating to the period should be recognized.

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