Intermediate Accounting Assignment -
Read each case and answer the questions. Your answers must be specific, well written, to the point and supported with the facts of the case. Each case can be answered with two-three paragraphs. Submit your work electronically through Canvas.
Ethics Case 1: You have recently been hired as the assistant controller for Stanton Industries, a large, publicly held manufacturing company. Your immediate supervisor is the controller who, in turn, is responsible to the vice president of finance.
The controller has assigned you the task of preparing the year-end adjusting entries. In the receivable area, you have prepared an aging of accounts receivable and have applied historical percentages to the balances of each of the age categories. The analysis indicates that an appropriate balance for the allowance for uncollectible accounts is $180,000. The existing balance in the allowance account prior to any adjusting entry is a $20,000 credit balance.
After showing your analysis to the controller, he tells you to change the aging category of a large account for over 120 days to current status and to prepare a new invoice to the customer with a revised date that agrees with the new aging category. This will change the required allowance for uncollectible accounts from $180,000 to $135,000. Tactfully, you ask the controller for an explanation for the change and he tells you "We need the extra income; the bottom line is too low."
Required:
What is the effect on income before taxes of the change requested by the controller?
Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.
Ethics Case 2: Horizon Corporation manufactures personal computers. The company began operations in 2004 and reported profits for the years 2007 through 2011. Due primarily to increased competition and price slashing in the industry, 2013's income statement reported a loss of $20 million. Just before the end of the 2014 fiscal year, a memo from the company's chief financial officer to Jim Fielding, the company controller, included the following comments:
If we don't do something about the large amount of unsold computers already manufactured, our auditors will require us to write them off. The resulting loss of 2014 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of our inventory to J.B. Sales, Inc., in Oklahoma City. I know the company's president and he will accept the merchandise and acknowledge the shipment as a purchase. We can record the sale in 2014 which will boost profits to an acceptable level. Then J.B. Sales will simply return the merchandise in 2014 after the financial statements have been issued.
Discuss the ethical dilemma faced by Jim Fielding, Controller including his options and what some of the possible outcomes might be. What would you do in this situation?
Ethics Case 3: In 2010 the Moncrief Company purchased from Jim Lester the right to be the sole distributor in the western states of a product called Zelenex. In payment, Moncrief agreed to pay Lester 20% of the gross profit recognized from the sale of Zelenex in 2011.
Moncrief uses a periodic inventory system and the LIFO inventory method. Late in 2011, the following information is available concerning the inventory of Zelenex:
Beginning Inventory, 1/1/11 (10,000 units @ $30) $ 300,000
Purchases (40,000 units @ $30) $ 1,200,000
Sales (35,000 units @ $60) $ 2,100,000
By the end of the year, the purchase price of Zelenex had risen to $40 per unit. On December 28, 2011, three days before year-end, Moncrief is in a position to purchase 20,000 additional units of Zelenex at the $40 per unit price. Due to the increase in purchase price, Moncrief will increase the selling price in 2012 to $80 per unit. Inventory on hand before the purchase, 15,000 units, is sufficient to meet the next six months' sales and the company does not anticipate any significant changes in purchase price during 2012.
Required:
Determine the effect of the purchase of the additional 20,000 units on the 2011 gross profit from the sale of Zelenex and the payment due to Jim Lester.
Discuss the ethical dilemma Moncrief faces in determining whether or not the additional units should be purchased.