the company. If Vroom Ltd makes $1 million profit, Freda receives a bonus of $20 000 that increases progressively to $30 000 for a $3 million profit. If the profit of Vroom Ltd exceeds $3 million, Freda receives the maximum bonus of $30 000. Vroom Ltd currently receives a grant from the government of $100 000 per year to employ and train apprentice mechanics.
At the end of May, it appears that Vroom Ltd will make a profit of approximately $3.5 million for the year ending 30 June 2016. Freda approached Lucia and said that if the company made too much profit then the government may stop paying Vroom Ltd the grant for training apprentice mechanics, and it would lose the $100 000 tax-free cash inflow. Freda instructed Lucia to find ways of deferring recognition of as much revenue as possible until the following financial year, for which the forecasts for the industry were quite poor, and to accrue as many expenses as possible at the end of the current accounting period when it came to making the end-of-period adjustments. Although Lucia was not happy with this instruction, she did not want to risk her own opportunities for promotion by upsetting her manager.
A. Who are the stakeholders in this situation?
B. Why do you believe Freda asked Lucia to do this?
C. What are the ethical issues involved her?
D. Can Lucia defer revenues and accrue as many expenses as possible and still be ethical?
A. The stakeholders are:
The manager, Freda Chuse
The accountant, Lucia
The present and potential shareholders of the entity.
B. Freda may well be asking Lucia to reduce the reported profit in an attempt to avoid losing the government grant for employing and training apprentice mechanics. It may also be that as Freda’s bonus is maximised when the firm earns $3m. there is no benefit to her in making $3.5m profit. However, if Freda believes that the following accounting period is not likely to make as much profit it is in her best interests to defer the recognition...