Question

Horizon Corporation manufactures personal computers. The company began operations in 2016 and reported profits for the years 2016 through 2019. Due primarily to increased competition and price slashing in the industry, 2020’s income statement reported a loss of $20 million. Just before the end of the 2021 fiscal year, a memo from the company’s chief financial officer to Jim Fielding, the company controller, included the following comments:

If we don’t do something about the large number of unsold computers already manufactured, our auditors will require us to write them off. The resulting loss for 2021 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of our inventory to J.A. Sales in Nevada. I know the company’s president and he will accept the merchandise and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost profits to an acceptable level. The J.A. Sales will simply return the merchandise in 2022 after the financial statements have been issued.

Answer 1

The chief financial officer's plan was unethical & may cause problems to the company as a whole.

The company has required to pay un necessary Tax on income if the dummy sale results into a profit.

The J.A. Sales in Nevada has to pay unnecessary Import duty on this dummy purchases.

Horizon Corporation should have used another methods like selling at discounted prices or some other legal ways.

The auditor in 2022, will definitely find out this kind of transactions & will report the same, which results in loss of not only Horizon Corporation's company but also J.A. Sales.

The act of Cheif financial officer's plan was unethical.