The company took a lot of debt five years ago to finance a major expansion, and the recent rise in interest rates, along with a decline in sales, has resulted in a large operating loss for the current year. Unfortunately, the decline in sales is likely to continue until the economy improves. Economists are not predicting an upturn for several years. In the meantime, the interest payments have tripled, and the company is scheduled to begin repaying the principal on the loan next year. There has been talk of layoffs and even bankruptcy. You have computed the current year's loss and the refunds due as a result of the loss carryback to the two previous years. The remaining loss will be reported as a loss carryforward and a deferred tax asset. You are concerned that the company may not have any future earnings and have computed a valuation allowance for the deferred tax asset that reduces it substantially. You take your calculations and journal entries to your boss, the controller, and she's pleased about the refunds the company will get. However, when she sees the journal entry for the valuation allowance, she refuses to approve it. "The company needs every asset it can report," she says. "Besides, these numbers are just your estimates. No one knows for sure what will happen in the future, so there's no good reason to make this entry." Evaluate the ethical issues in this situation. Determine who the stakeholders are, and how they will be affected. Analyze your options and make a recommendation based on those options.

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter9: Decision Making Under Uncertainty

Section: Chapter Questions

Problem 30P

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The company took a lot of debt five years ago to finance a major expansion, and the recent rise in interest rates, along with a decline in sales, has resulted in a large operating loss for the current year. Unfortunately, the decline in sales is likely to continue until the economy improves. Economists are not predicting an upturn for several years. In the meantime, the interest payments have tripled, and the company is scheduled to begin repaying the principal on the loan next year. There has been talk of layoffs and even bankruptcy.

You have computed the current year's loss and the refunds due as a result of the loss carryback to the two previous years. The remaining loss will be reported as a loss carryforward and a deferred tax asset. You are concerned that the company may not have any future earnings and have computed a valuation allowance for the deferred tax asset that reduces it substantially.

You take your calculations and journal entries to your boss, the controller, and she's pleased about the refunds the company will get. However, when she sees the journal entry for the valuation allowance, she refuses to approve it. "The company needs every asset it can report," she says. "Besides, these numbers are just your estimates. No one knows for sure what will happen in the future, so there's no good reason to make this entry."

Evaluate the ethical issues in this situation.
Determine who the stakeholders are, and how they will be affected.
Analyze your options and make a recommendation based on those options.

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