Anita 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, Anita 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.1. How does lowering the estimate of doubtful accounts affect the income statement and balance sheet?2. Is there an ethical consideration in this case? If so, what is it?3. Should Anita be permitted to weigh in on adjusting entries under these circumstances? Why or why not?

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Asked Nov 12, 2019
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Anita 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, Anita 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.
1. How does lowering the estimate of doubtful accounts affect the income statement and balance sheet?
2. Is there an ethical consideration in this case? If so, what is it?
3. Should Anita be permitted to weigh in on adjusting entries under these circumstances? Why or why not?

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Expert Answer

Step 1

1.When expenses are decreased, profitability of the company increases. Hence, when the estimate of doubtful accounts decreases, it would imply a reduction in bade debt expenses which would in turn increase the profits in the Income statement.

In the Blance Sheet, Accounts Receivable are shown net of allowance for doubtful accounts. When the eatimate for doubtful accounts decreases, the accounts receivable balance would be higher and hence the assets would be inflated.

Thus, lowering the estimates of doubtful accounts would inflate the Net profits in the Income statement and inflate Accounts Receivable in the Balance Sheet.

Step 2

2. There is an ethical consideration in the given case.

In order to increase her incentive compensation. the manager of the company is contemplating fabrication of accounts. A...

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