AP3–51 You have recently been hired as the assistant controller for Stanton Temp
ID: 2571657 • Letter: A
Question
AP3–51 You have recently been hired as the assistant controller for Stanton Temperton Corporation, which rents building space in major metropolitan areas. Customers are required to pay six months of rent in advance. At the end of 2018, the company's president, Jim Temperton, notices that net income has fallen compared to last year. In 2017, the company reported before-tax profit of $330,000, but in 2018 the before-tax profit is only $280,000. This concerns Jim for two reasons. First, his year-end bonus is tied directly to before-tax profits. Second, shareholders may see a decline in profitability as a weakness in the company and begin to sell their stock. With the sell-off of stock, Jim's personal investment in the company's stock, as well as his company-operated retirement plan, will be in jeopardy of severe losses.
After close inspection of the financial statements, Jim notices that the balance of the Deferred Revenue account is $120,000. This amount represents payments in advance from long-term customers ($80,000) and from relatively new customers ($40,000). Jim comes to you, the company's accountant, and suggests that the firm should recognize as revenue in 2018 the $80,000 received in advance from long-term customers. He offers the following explanation: “First, we have received these customers' cash by the end of 2018, so there is no question about their ability to pay. Second, we have a long-term history of fulfilling our obligation to these customers. We have always stood by our commitments to our customers and we always will. We earned that money when we got them to sign the six-month contract.”
1.Identify the ethical situation and the people who will be affected
2. Specify the options for alternative courses of action
3.understand the impact of each option on the stakeholders
4. make a decision
Explanation / Answer
In this case, the issue is of reporting $80,000 unearned revenue as service revenue for the current year, as instructed by the president. The president instructs this unethical accounting practice to present the current year financial better than previous year to meet his personal interest. By this unethical action the before –tax profit of the company will be $360000(280000+80000) which would make profit of the current year look better than previous year. Moreover, in the current years’ balance sheet, the liabilities would be understated by $80,000(unearned revenues), since the same is considered as service revenue.
In this case, as a result of the unethical accounting practice of taking into account the unearned revenue in the current year, the financial statement will not represent the true and fair view of the state of affairs of the company. This will communicate mislead information to all the parties like investors, creditors, suppliers, employees and government agencies, who take decisions relying the information as fair.
I as the assistant controller of the company would consider the following factors while making decisions;
1. I as the assistant controller of the company would like to work with professional ethics and fairness.
2. Being new to the position in the company I may not be right in refusing to accede to the instruction from the president for the unethical action, as there is chance of me losing my job.
3. On the contrary, if I would make the adjustments as required by the president, he would be satisfied and I could be in his good books. This will help me in my growth in the company.
4. When the adjustment of the unearned revenue would be adjusted in the current year, that will make the next year profit lower and as a result, the stock price will fall, putting the investors into loss.