Question

8:29 Aa 1» Q X Q 3-55 prior year's. The decline in sales and profits appears to be a one-year aberration. But even so, the company president fears a large dip in the current year's profits. He believes that such a dip could cause a significant drop in the market price of Russell's stock and make the company a takeover target. To avoid this possibility, the company president calls in Zoe Baas, controller, to discuss this period's year-end adjusting entries. He urges her to accrue every possible revenue and to defer as many expenses as possible. He says to Zoe, "We need the revenues this year, and next year can easily absorb expenses deferred from this year. We can't let our stock price be hammered down!" Zoe didn't get around to recording the adjusting entries until January 17, but she dated the entries December 31 as if they were recorded then. Zoe also made every effort to comply with the president's request. Instructions a. Who are the stakeholders in this situation? b. What are the ethical considerations of (1) the president's request and (2) Zoe dating the adjusting entries December 31? c. Can Zoe accrue revenues and defer expenses and still be ethical? viii 3-56 3 Reader Contents Notebook Bookmarks Bookmarks More

parts a,b,c

Answer 1

(a)        The stakeholders in this situation are:

}          Zoe Baas, controller.

}          The president of Russell Company.

}          Russell Company stockholders.

(b)    

1.           It is unethical for the president to place pressure on Zoe to misstate net income by requesting her to prepare incorrect adjusting entries.

2.         It is customary for adjusting entries to be dated as of the balance sheet date although the entries are prepared at a later date. Zoe did nothing unethical by dating the adjusting entries December 31.

(c)        Zoe can accrue revenues and defer expenses through the preparation of adjusting entries and be ethical so long as the entries reflect economic reality. Intentionally misrepresenting the company’s financial condition and its results of operations is unethical (it is also illegal).