You have recently been hired as the assistant controller forStanton Temperton Corporation, which rents building space in majormetropolitan areas. Customers are required to pay six months ofrent in advance. At the end of 2018, the company's president, JimTemperton, notices that net income has fallen compared to lastyear. In 2017, the company reported before-tax profit of $330,000,but in 2018 the before-tax profit is only $280,000. This concernsJim for two reasons. First, his year-end bonus is tied directly tobefore-tax profits. Second, shareholders may see a decline inprofitability as a weakness in the company and begin to sell theirstock. With the sell-off of stock, Jim's personal investment in thecompany's stock, as well as his company-operated retirement plan,will be in jeopardy of severe losses. After close inspection of thefinancial statements, Jim notices that the balance of the DeferredRevenue account is $120,000. This amount represents payments inadvance from long-term customers ($80,000) and from relatively newcustomers ($40,000). Jim comes to you, the company's accountant,and suggests that the firm should recognize as revenue in 2018 the$80,000 received in advance from long-term customers. He offers thefollowing explanation: “First, we have received these customers'cash by the end of 2018, so there is no question about theirability to pay. Second, we have a long-term history of fulfillingour obligation to these customers. We have always stood by ourcommitments to our customers and we always will. We earned thatmoney when we got them to sign the six-month contract.”
Discuss the ethical dilemma you face:
1. What is the issue?
2. Who are the parties affected?
3. What factors should you consider in making your decision?
4. What is the stance you will take?
Required: 1) Reach a consensus concerning the answers to thefour questions.
2) Write a memo to the company’s controller discussing the issueand the stance that your group is taking.
