Q1EI - Horngren'S Financial And Managerial Accounting

Question

Raffie’s Kids, a nonprofit organization that provides aid to victims of domestic violence,low-income families, and special-needs children, has a 30-year, 5% mortgageon the existing building. The mortgage requires monthly payments of \(3,000. Raffie’sbookkeeper is preparing financial statements for the board and, in doing so, lists themortgage balance of \)287,000 under current liabilities because the board hopes to beable to pay the mortgage off in full next year. Of the mortgage principal, $20,000 willbe paid next year if Raffie’s pays according to the mortgage agreement. The boardmembers call you, their trusted CPA, to advise them on how Raffie’s Kids shouldreport the mortgage on its balance sheet. What is the ethical issue? Provide and discussthe reason for your recommendation.

Step-by-Step Solution

Answer

The U.S.GAAP is an authority of the USA that creates the accounting principles and rules related to the accounting procedures

Step 1: Definition of long-term liability

The long-term liability is the liability that which are payable by the company after the completion of operating cycle or 12 months.

Step 2: Missing ethical issue

The ethical issue of this situation is that the organization is not following the principles of IFRS and U.S. GAAP.  According to these principles, the amount of the mortgage payable is a long-term liability. Only the current potion of the mortgage payable is recorded as a current liability. The current portion of the mortgage payable means the part of bonds that becomes due in 12 months.

In this, only $20,000 thousand is recorded in the current liabilities because the $20,000 is paid in the next year. The remaining balance of the mortgage payable is shown as a long-term liability.