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Chapter 13: Q7CA (page 705)

CA13-7 ETHICS (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of \(600 per month plus 5% of yearly profits over \)500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.

Instructions

Answer the following questions.

(a) Should Hamilton follow his boss鈥檚 directive?

(b) Who is harmed if the estimates are increased?

(c) Is Matt Rich鈥檚 directive ethical?

Short Answer

Expert verified

Answer:

(a) No, Hamilton should not follow his boss鈥檚 directive.

(b) Stakeholders

(c) No, Matt Rich鈥檚 directive is not ethical.

Step by step solution

01

Explanation for Part a

If Hamilton follow his boss鈥檚 directives, then this act will manipulate the books of accounts and doesn鈥檛 provide true and fair view of financial statements.

02

Explanation for Part b

If Hamilton increase the estimate, then it would decrease the net profit of the firm. The reduction in profits affect all stakeholders including investors who had invested their money in the company and thus their returns will also reduce. This will also decrease the fee of Dotson Company

03

Explanation for Part c

Matt Rich鈥檚 directive is not ethical because it causes manipulation of company鈥檚 account and he is also cheating Dotson Company by intentionally reducing its fee.

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Most popular questions from this chapter

BE13-10 (L03) Scorcese Inc. is involved in a lawsuit at December 31, 2017. (a) Prepare the December 31 entry assuming it is probable that Scorcese will be liable for $900,000 as a result of this suit. (b) Prepare the December 31 entry, if any, assuming it is not probable that Scorcese will be liable for any payment as a result of this suit.

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

Question: What evidence is necessary to demonstrate the ability to defer settlement of short-term debt?

Should a liability be recorded for risk of loss due to lack of insurance coverage? Discuss.

Distinguish between a determinable current liability and a contingent liability. Give two examples of each type.
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