antia brown is the manager of a wholesale food company. her compensation in part

Question

antia brown is the manager of a wholesale food company. her compensation in part is incentive based. in other words the higher the company income the higher her incentive compensation. each year in an effort to influence her bonus antia makes several recommendations concerning adjusting entries to the company controller one of her favorites is to ask the controller to reduce the estimate of doubtful accounts.

how does lowering the estimate of doubtful accounts affect the income statement and balance sheet?

Is there an ethical consideration in this case? is so what is it?

should antia be permitted to weigh
in on adjusting entries under these circumstances? why or why not?

Explanation / Answer

Lowering the estimate of doubtful accounts would reduce the bad debts expense. This will have the effect of overstating the income to the advantage of Antia.

As the estimate of doubtful accounts is understated, the net accounts receivable balance will be higher. It will have the effect of overstating the accounts receivables and hence the current assets/total assets in the Balance sheet. As income is overstated to the same extent, retained earnings, shareholders' funds and the total liabilities & shareholders' funds will also be overstated.

Yes, there is an ethical issue here. It is the manipulation of accounting estimates to show higher performance to get higher rewards.

Antia should not be allowed to weigh in on adjusting entries as it will have the effect of manipulating the financial statements to gain undue personal advantage.

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