Phoenix Press produces consumer magazines. Thehouse and home division, which sells home-improvement and home-decorating magazines, has seen a 20%reduction in operating income over the past 9 months, primarily due to an economic recession and a depressedconsumer housing market. The division’s controller, Sophie Gellar, has felt pressure from the CFO toimprove her division’s operating results by the end of the year. Gellar is considering the following options forimproving the division’s performance by year-end: a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of 25 employees.b. Selling the new printing equipment that was purchased in January and replacing it with discardedequipment from one of the company’s other divisions. The previously discarded equipment no longermeets current safety standards.c. Recognizing unearned subscription revenue (cash received in advance for magazines that will bedelivered in the future) as revenue when cash is received in the current month (just before fiscalyear-end) instead of showing it as a liability.d. Reducing the liability and related expense related to employee pensions. This would increase thedivision’s operating income by 3%.e. Recognizing advertising revenues that relate to January in December.f. Switching from declining balance to straight-line depreciation to reduce depreciation expense in thecurrent year. What are the motivations for Gellar to improve the division’s year-end operating earnings?

Question

Phoenix Press produces consumer magazines. The
house and home division, which sells home-improvement and home-decorating magazines, has seen a 20%
reduction in operating income over the past 9 months, primarily due to an economic recession and a depressed
consumer housing market. The division’s controller, Sophie Gellar, has felt pressure from the CFO to
improve her division’s operating results by the end of the year. Gellar is considering the following options for
improving the division’s performance by year-end:

a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of 25 employees.
b. Selling the new printing equipment that was purchased in January and replacing it with discarded
equipment from one of the company’s other divisions. The previously discarded equipment no longer
meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be
delivered in the future) as revenue when cash is received in the current month (just before fiscal
year-end) instead of showing it as a liability.
d. Reducing the liability and related expense related to employee pensions. This would increase the
division’s operating income by 3%.
e. Recognizing advertising revenues that relate to January in December.
f. Switching from declining balance to straight-line depreciation to reduce depreciation expense in the
current year.
 What are the motivations for Gellar to improve the division’s year-end operating earnings?

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