Blenheim Instruments Ltd and bad debts - Accounting Assignment

Internal Code: MAS3282

Accounting Assignment:

Jenny Pike, the assistant accountant for Blenheim Instruments Ltd, was finalizing the balance sheet of the company as at 30 June 2015 with the accountant of the business, Rusell Bayer. Although both agreed that agreed that everything appeared to be in order, Jenny had noticed that a large loan had been taken out by the company with AB Bank and that, as part of the loan agreement, Blenheim Instruments Ltd was to maintain a ratio of current asset(fewer inventories) to current liabilities of at least 1.25:1. She was concerned that the company would not be able to maintain this ratio given the fact that she had just learned that two of the company’s largest costumers had gone into liquidation and there was every likelihood that the company would recover no more than 10% of the debts owing. The current allowance for doubtful debts was grossly inadequate and thus the accounts receivable were overstated. The relevant figures prepared for the balance sheet showed current assets(fewer inventories) standing at $1250000, and current liabilities stood at $1000000. Jenny raised her concerns with Rusell Bayer about the overstatement of accounts receivable and not being able to maintain the desired minimum ratio for the purpose of the loan agreement if the accounts receivable figure was updated. Rusell replied: ‘Yes, I can appreciate your concerns. However, we don’t know how much will be recovered from the liquidated companies, so let’s leave things the way they are. The bank wants only the 30 June figures and, as it is, the ratio will be okay as far as the bank is concerned.’ Rusell thought about the problem a little further and then explained: ‘We won’t have to write off the additional bad debts until next year when they occur and are known with certainty, and by then things will have picked up, I am sure the directors of the company will agree with me, and be happy to leave the accounts as they are, so there is no need for you to worry anymore.’ Questions: A. Identify the stakeholders involved in this situation. B. What are the main ethical issues involved? C. What actions are available to Jenny to resolve the dilemma she faces? D. What would you do if you were Jenny?