Cypress Company is a subsidiary of Peppermint Corp. The controller of Cypress believes that the yearly allowance for doubtful accounts for Cypress should be 2% of net credit sales. The president of Cypress, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 3% yearly. The president thinks that the resulting lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Cypress Company.
The main discussion points are:
1. Should the controller be concerned with Cypress Company's growth rate in estimating the allowance? Explain your answer
2. Does the president's request pose an ethical dilemma for the controller? Give your reasons.
3. How can accounting for bad debts potentially be used for earnings management? Give your reasons.