Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881



Cornerstones of Financial Accounti...

4th Edition
Jay Rich + 1 other
ISBN: 9781337690881
Textbook Problem

Ethics and Current Liabilities

Many long-term loans have contractual restrictions designed to protect the lender from deterioration of the borrower’s liquidity or solvency in the future. These restrictions (typically called loan covenants) often take the form of financial-statement ratio values. For example, a lending agreement may state that the loan principal is immediately due and payable if the current ratio falls below 1.2. When borrowers are in danger of violating one or more of these loan covenants, pressure is put on management and the financial accountants to avoid such violations.

Jim is a second year accountant at a large publicly traded corporation. His boss approaches him and says,

"Jim, I know why we increased our warranty liability, but it puts our current ratio in violation

of a loan covenant with our bank loan. I know the bank will pass on it this time, but it’s a big

hassle to get the waiver. I just don’t want to deal with it. I need you to reduce our estimate of

warranty liability as far as possible."


Given that Jim’s employer is a publicly traded corporation, what safeguards should be at Jim’s disposal?

To determine

Concept introduction:

Warranty Expense:

A company may issue warranty with the sale of its product which bounds the company to replace or repair in case of quality failure according to the terms of the warranty. The provision for the estimated warranty liability is made at the time of sale of the products and warranty expense is recorded. This provision is utilized at the time of performing the warranty contract.

Current Ratio:

Current Ratio is measure of the company’s ability to pay off its current liabilities using its current assets. It is calculated by dividing the total current assets by total current liabilities. The formula of the current ratio is as follows:

Current Ratio=Current assetsCurrent liabilities

To indicate:

The course of action for the employee of a publicly traded company.


Jim’s boos wants him to lower the estimated warranty liability in order to keep the current ratio above the threshold limit as given in the loan covenant. Lowering the warranty liability would result in lower current liability and the lower current liability will result in higher current ratio...

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What are the major elements of Taylors scientific management?

Foundations of Business (MindTap Course List)

What is a relationship, and what three types of relationships exist?

Database Systems: Design, Implementation, & Management

What does the term 3 Vs refer to?

Database Systems: Design, Implementation, & Management

Explain the difference between average and instantaneous speed.

Engineering Fundamentals: An Introduction to Engineering (MindTap Course List)

Define service-drop conductors.


Design flange-to-web welds for the girder of Problem 10.4-5. a. Use LRFD. b. Use ASD.

Steel Design (Activate Learning with these NEW titles from Engineering!)

Differentiate among UWB, IrDA, RFID, and NFC technologies.

Enhanced Discovering Computers 2017 (Shelly Cashman Series) (MindTap Course List)

Which Transport layer protocol does PPTP use?

Network+ Guide to Networks (MindTap Course List)