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Dinesh Patel of Davidson Enterprises

Dinesh Patel is the sales manager of Davidson Enterprises, a very profitable distributor of office furniture to local businesses. A recent economic downturn has created an extremely tight cash position, and the company has been hurt by the bankruptcy of two key customers.

In late October, anticipating an economic recovery, Patel began an extensive remodelling of the company's sales floor. Construction costs, decorating, and equipment purchases are projected to cost $250,000.

Davidson has a policy that individual expenditures in excess of $200,000 must be approved by the firm's board of directors. Patel, unfortunately, missed the deadline to have the board consider this project at its regular September meeting. Not wanting to wait until the next meeting in December, he subdivided the project in two parts: construction and decorating ($190,000) and equipment purchases ($60,000); neither of which needed board approval because of the dollar amounts involved.

The project was recently completed and sales have begun to recover. Customers have raved about the new sales area, noting that it is far superior to those of Davidson's competitors.

A. Would Patel's approach of subdividing the project in two parts have any effect on the company's financial statements? Briefly explain.
B. Briefly discuss whether Patel behaved in an ethical manner.
C. Which, if any, of the following standards of conduct would have applicability to Patel's conduct: competence, confidentiality, integrity, or credibility? Briefly explain.

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Solution Preview

A) No, it will not have any effect in the company's financial statement.
With one transaction of $250,000, the journal entries are as follows:

Dr Building $190,000
Dr. Equipment $60,000
Cr. Cash $250,000

With the subdividing projects, the journal entries are:

Dr Building $190,000
Cr. Cash $190,000

Dr. Equipment $60,000
Cr. Cash $60,000

On the balance sheet, in both cases, the cash goes down by $250,000, building increases by $190,000 and equipment increases by $60,000.

There is no ...

Solution Summary

This response analyzes the behavior of the sales manager of Davidson Enterprises and his effect on the company's financial statements.