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Chapter 13: Q7CA (page 705)

CA13-7 ETHICS (Warranties) The Dotson Company, owner of Bleacher Mall, charges Rich Clothing Store a rental fee of \(600 per month plus 5% of yearly profits over \)500,000. Matt Rich, the owner of the store, directs his accountant, Ron Hamilton, to increase the estimate of bad debt expense and warranty costs in order to keep profits at $475,000.

Instructions

Answer the following questions.

(a) Should Hamilton follow his boss’s directive?

(b) Who is harmed if the estimates are increased?

(c) Is Matt Rich’s directive ethical?

Short Answer

Expert verified

Answer:

(a) No, Hamilton should not follow his boss’s directive.

(b) Stakeholders

(c) No, Matt Rich’s directive is not ethical.

Step by step solution

01

Explanation for Part a

If Hamilton follow his boss’s directives, then this act will manipulate the books of accounts and doesn’t provide true and fair view of financial statements.

02

Explanation for Part b

If Hamilton increase the estimate, then it would decrease the net profit of the firm. The reduction in profits affect all stakeholders including investors who had invested their money in the company and thus their returns will also reduce. This will also decrease the fee of Dotson Company

03

Explanation for Part c

Matt Rich’s directive is not ethical because it causes manipulation of company’s account and he is also cheating Dotson Company by intentionally reducing its fee.

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