You have recently been hired as the assistant controller for Stanton Industries,

Question

You have recently been hired as the assistant controller for Stanton Industries, a large, publicly held manufacturing company. Your immediate superior 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 receivables 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 from 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 %u201CWe need the extra income, the bottom line is too low.%u201D

1.

What is the effect on income before taxes of the change requested by the controller?

2.

Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.

1.

What is the effect on income before taxes of the change requested by the controller?

2.

Discuss the ethical dilemma you face. Consider your options and responsibilities along with the possible consequences of any action you might take.

Explanation / Answer

1. Required allowance Dr $180,000

Revised allowance Cr 135,000

Increase in income before taxes of proposed change Cr$45,000

2.Ethical Dilemma:

You as the assistant controller have a responsibility to follow GAAP and make a reasonably accurate estimate of the net realizable value of receivables. Is your responsibility to fairly present Stanton Industries' financial statements to external users greater than your obligation to improve the financial position of your employer?

Alternative actions and consequences include:

1. Refuse to comply with the controller's request to change the aging category of the large account.

Positive consequences:

a. Preservation of your honesty and integrity.

b. Fair presentation of the net realizable value of receivables.

Negative consequences:

a. Possible loss of your job.

b. Lower net income for Stanton Industries.

c. A devalued stock price for Stanton Industries.

2. Comply with the controller's suggestion to report the allowance for uncollectible accounts at $135,000.

Positive consequences:

a. Retention of your job.

b. A more favorable net income for Stanton Industries.

c. A more favorable position with unknowing creditors, financial analysts, current investors, and future investors.

Negative consequences:

a. Endure guilt feelings.

b. A lack of trust in you by other managers and employees.

c. Possible litigation from investors and creditors.

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