Outdoors R Us owns several membership-based campground resorts throughout the So

Question

Outdoors R Us owns several membership-based campground resorts throughout the Southwest. The company sells campground sites to new members, usually during a get-acquainted visit and tour. The campgrounds offer a wider array of on-site facilities than most. New members sign a multi-year contract, pay a down payment, and make monthly installment payments. Because no credit check is made and many memberships originate on a spur-of-the-moment basis, cancellations are not uncommon.

Business has been brisk during its first three years of operations, and since going public in 2000, the market value of its stock has tripled. The first sign of trouble came in 2013 when the new sales dipped sharply.

One afternoon, two weeks before the end of the fiscal year, Diane Rice, CEO, and Gene Sun, controller, were having an active discussion in Sun's office.

Sun: I've thought more about our discussion yesterday. Maybe something can be done about profits. Rice: I hope so. Our bonuses and stock value are riding on this period's performance. Sun: We've been recording unearned revenues when new members sign up. Rather than recording liabilities at the time memberships are sold, I think we can justify reporting sales revenue for all memberships sold. Rice: What will be the effect on profits? Sun: I haven't run the numbers yet, but let's just say very favorable.

Consider these questions:

Why do you think liabilities had been recorded previously?

Is the proposal ethical?

Who would be affected if the proposal is implemented?

Do you agree with your classmates' responses?

Explanation / Answer

The liabilities recorded are dipping sharply of new sales in 2013. This shows that the company lost its market to its competitors. The stock value is currently riding on previous performance, an indication of presence of liabilities. Recording of unearned revenue when new members sign up also shows liability. Lastly to fail to record liabilities when membership is sold is an omission showing non-compliance of accounting policies.

The proposal is unethical since it does not involve the members who are the shareholders of the company. The moment shareholders are not involved in company proposals, it is seen as if the management who should be custodians of their welfare are taking advantage. To make honest look suspicious while making a proposal is unethical.

If the proposal is implemented, the new members who just signed up will be affected. They will not know the actual stock value of the company. Secondly the exact figure of unearned revenue will be a nightmare to them. This will be a great disservice and an unprofessional way to welcome the new members.

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