Textbook Problem

Loan application

Daryl Kirby opened Squid Realty Co. on January 1, 20Y3. At the end of the first year, the business needed additional capital. On behalf of Squid Realty Co., Daryl applied to Ocean National Bank for a loan of $375,000. Based on Squid Realty Co.’s financial statements, which had been prepared on a cash basis, the Ocean National Bank loan officer rejected the loan as too risky.

After receiving the rejection notice, Daryl instructed his accountant to prepare the financial statements on an accrual basis. These statements included $65,000 in accounts receivable and $25,000 in accounts payable. Daryl then instructed his accountant to record an additional $30,000 of accounts receivable for commissions on property for which a contract had been signed on December 28, 20Y3. The title to the property is to transfer on January 5, 20Y4, when an attorney formally records the transfer of the property to the buyer.

Daryl then applied for a $375,000 loan from Free Spirit Bank, using the revised financial statements. On this application, Daryl indicated that he had not previously been rejected for credit.

Discuss the ethical and professional conduct of Daryl Kirby in applying for the loan from Free Spirit Bank.