Question

In: Accounting

Accounting ethics cases You have recently been hired as the assistant controller for Stanton Temperton Corporation,...

Accounting ethics cases

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 sixmonth contract.”

1. Summarize your case.

2. What is the dilemma?

3. What is the ethical solution?

4. What would you do if you are faced with the dilemma?

Solutions

Expert Solution

1) Summary: Stanton Temperton Corporation is facing finincial crisis as their net income has fallen as compared to previous year. Company's president fears downfall in stock price thus communicating a weakness in the company. This can jeopardise the value of his stocks as well as his year end bonus which is directly liked to before tax-profits along with other things. Company has certain deferred revenue income which he proposes to include in revenue this year to increase the profits.

2) Dilemma: The dilemma is whether Deferred revenue income of $ 120,000 could be recognised as revenue this year as there is a written contract with these customers and the company has a history of meeting their obligations. However, only $80,000 out of this is from old customers while $ 40,000 is from nw customers. Also, company has received the income in cash, so there is no question of non-payment.

3)Ethical Solution: Accountant should not record it as revenue. Assuming the accrual method of accounting, which is GAAP (Generally Accepted Accounting Principles), revenue is recorded when earned. The corporation has not "earned" the revenue yet. However, if services are rendered or rights to use assets extend continuously over time (for example rent), reliable measures based on contractual prices established in advance are commonly available, and revenues may be recognized as earned as time passes, if there is reasonable certainity. The past records suggests that comapny has met it's obligations, but that includes old customers. Hence company can record advance from old customers if they feel that all other conditions of revenue recognition as per GAAP has been satisfied.

4)What would I do if you are faced with the dilemma?

I would have adopted the ethical solution.


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