Question

E1.3 (LO 2) Angela Duffy, president of Duffy Company, has instructed Jana Barth, the head of the ac- counting department for Duffy Company, to report the company's land in the company's accounting reports at its fair value of $170,000 instead of its cost of $100,000. Duffy says, "Showing the land at $170,000 will make our company look like a better investment when we try to attract new investors next month. cost Ir Instructions Explain the ethical situation involved for Jana Barth, idlentifying the stakeholders and the alternatives.

Answer 1

E1.3:

The president for the Duffy Company has asked the head of the accounting department to report the company’s land at its fair value instead of its cost of $100000, which is an unethical instruction. This is because by doing so the accountant and the Duffy company has been violating the “Historical Cost accounting principle”, which says that the assets should be valued on their purchase price and the same should be reported at the historical cost on the balance sheet. The stakeholders of such an event are the existing shareholders and prospective investors who get their money invested in the company on the basis of inflated balance sheet.

As an alternative, we can put a note underneath the balance sheet that the land has been valued at its fair value and make a proper adjusting entry by increasing land and taking the unrealized income to the Retained Earnings under the Consolidated Balance Sheet.