Company Case Study

Description

EC3: Russell Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Russell’s chemical pesticides. In the coming year, Russell will have environmentally safe and competitive chemicals to replace these discontinued products. Sales in the next year are expected to greatly exceed those from any prior years. 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.

Weygandt, J.J., Kimmel, P.D., & Kieso, D.E (2021). Accounting Principles (14th Ed.). Hoboken, NJ: John Wiley & Sons, Inc.Respond thoroughly to the following questions in your PowerPoint presentation:

• Who are the stakeholders in this situation?
• What are the ethical considerations of (a) the president’s request and (b) Zoe dating the adjusting entries December 31?
• Can Zoe accrue revenues, defer expenses, and still be ethical?
• Can Zoe’s accrued revenues and deferred expenses be illegal?
• Who do you think can discover Zoe’s accrued revenues and deferred expenses?