Gwen MacDonals works as an accountant for Sky High Condos,

Gwen MacDonals works as an accountant for Sky High Condos, which is owned by Sam Huang. The business currently owns two buildings with 100 units in each. Sky High is in the process of expanding by building new condo buildings in other provinces. In order to finance the expansion, Sam needs to borrow from the bank. His concern is that the bank may not approve his current financial statements. 

In December 2019, Sam suggests that Gwen reclassify all of the unearned revenue to the income statement. The unearned revenue includes deposits on hand from tenants: 60% are last month’s rent, and 40% are security deposits. 

Sam’s argument is that at least 40% of the balance can be recognized as he has never seen damage to any of the units and therefore believes it isn’t a liability. 

Gwen is in an awkward position as she doesn’t want to offend her boss, but she thinks that recording the reclassification would be wrong. What course of action would you suggest for Gwen? In your answer, include the impact the reclassification would have on the financial statements and how the bank might interpret them.