Background information: It is February 16, 2018, and you are auditing Davenport Corporation's financial statements for 2017
Question:
Background information:
It is February 16, 2018, and you are auditing Davenport Corporation's financial statements for 2017 (which will be issued in March 2018). You read in the newspaper that Travis Corporation, a major customer of Davenport, is in financial difficulty. Included in Davenport's accounts receivable is $50,000 (a material amount) owed to it by Travis. You approach Jim Davenport, president, with this information and suggest that a reduction of accounts receivable and recognition of a loss on doubtful accounts for 2017 might be appropriate. Jim replies, "Why should we make an adjustment? Ted Travis, the president of Travis Company, is a friend of mine; he will find a way to pay us, one way or another. Furthermore, this occurred in 2018, so let's wait and see what happens; we can always make an adjustment later this year."
What to do:
Write an professional memo to Jim Davenport and address the following:
- The ethical issues you both face.
- The major stakeholders involved and state how the stakeholders would be affected by the course of action suggested by Jim Davenport.
- Explain why you believe the course of action proposed by Jim Davenport is ethical or unethical.
- Explain the proper accounting treatment and support your answer with appropriate authoritative citation.