As its year-end approaches, it appears that Lopez Corporation’s net income will increase 10%

this year. The president of Lopez Corporation, nervous that the stockholders might expect the company to sustain this 10% growth rate in net income in future years, suggests that the controller increase the allowance for doubtful accounts to 4% of receivables in order to lower this year’s net income. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate of growth for Lopez Corporation in future years. The controller of Lopez Corporation believes that the company’s yearly allowance for doubtful accounts should be 2% of receivables.

Instructions

(a) Who are the stakeholders in this case?

(b) Does the president’s request pose an ethical dilemma for the controller?

(c) Should the controller be concerned with Lopez Corporation’s growth rate in estimating the allowance? Explain your answer.

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