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Ethic case: Santa Fe Company's adjusting entries

Santa Fe Company is a pesticide manufacturer. Its sales declined greatly this year due to the passage of legislation outlawing the sale of several of Santa Fe's chemical pesticides. In the coming year, Santa Fe will have environmentally safe and competitive chemicals to replace these discontinued products. Sales in the next year are expected to greatly exceed any prior year's. The decline in sales and profits appears to be a one-year aberration. But even so, the company president fears a large dip in the current year's profits. He believes that such a dip could cause a significant drop in the market price of Santa Fe's stock and make the company a takeover target.

To avoid this possibility, the company president calls in Diane Leto, controller, to discuss this period's year-end adjusting entries. He urges her to accrue every possible revenue and to defer as many expenses as possible. He says to Diane, "We need the revenues this year, and next year can easily absorb expenses deferred from this year.We can't let our stock price be hammered down!" Diane didn't get around to recording the adjusting entries until January 17, but she dated the entries December 31 as if they were recorded then. Diane also made every effort to comply with the president's request.

(a) Who are the stakeholders in this situation?

(b) What are the ethical considerations of (1) the president's request and (2) Diane's dating the adjusting entries December 31?

(c) Can Diane accrue revenues and defer expenses and still be ethical?

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(a) Who are the stakeholders in this situation?

Santa Fe Company is a pesticide manufacturer and its sales have declined in the current year because of the new law passed by the Government not permitting it to sell the pesticide. However, the company will sell the environmentally friendly pesticides from the coming year and the current year profit will only be the aberration. President of the company wants to increase the profit artificially by entering the accrued and expenses and treating the ordinary expenses as deferred revenue expenses. The move of president is totally unethical and is against the Accepted principles and Accounting standards. Here, the shareholders are affected. Because, by inflating artificially the revenue will result in the erosion of net worth of the company. If the Company does not do well in the forthcoming years also, then it will lead ...

Solution Summary

The answer contains explanation regarding the ethical issues involved in making adjusting entries (record the unearned revenue and defer the expenses) to make artificial profit and the stakeholders involved in this issue.