Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better.After reviewing the annual reports, the CEO, N, O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, “We’ve decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.”Carl made the adjustments even though he doesn’t think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company’s navel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.RequirementsWhat effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?What type of information in the financial reports would have helped the bank detect this reclassification?Has a fraud occurred? If so, what is the fraud?

Question
Asked Jan 11, 2020
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Wild Adventure conducts tours of wildlife reserves around the world. The company recently purchased a lodge in Adelaide, Australia, securing a 4% mortgage from First Bank. In addition to monthly payments, Wild Adventure must provide annual reports to the bank showing that the company has a current ratio of 1.2 or better.

After reviewing the annual reports, the CEO, N, O. Scrooge, approached Carl Hauptfleisch, the CFO, and stated, “We’ve decided we are going to move all our long-term debt investments into our brokerage account so we can sell them soon. Carl, go ahead and make the adjusting entries as of the current year-end.”

Carl made the adjustments even though he doesn’t think the company will actually go ahead with the planned sale of the long-term debt investments. The subsequent year, the economy turned, and the company’s navel revenues dropped more than 60%. Wild Adventure eventually defaulted on the First Bank loan.

Requirements

  1. What effect did the adjustments have on the financial statements? What effect did the adjustments have on the current ratio?
  2. What type of information in the financial reports would have helped the bank detect this reclassification?
  3. Has a fraud occurred? If so, what is the fraud?
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Expert Answer

Step 1

Fraud Case

 

Case Summary: Company W purchased a lodge in A by securing 4% mortgage from F bank. According to the term of the bank Company W must show a current ratio of 1:2 or better in its annual reports, in addition to the monthly payments. After reviewing the annual report, the CEO ordered the CFO to move all long-term and held-to-maturity to brokerage account, so that those can be sold soon. The CFO followed the order by making adjustments. In the subsequent year Company’s travel revenues fall more than 60...

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