Bespin Corporation is a large Canadian company that specializes in the mining, refining, and distribution of tibanna gas. Bespin is publicly traded on the TSX stock exchange, and has a fiscal year end of December 31. Lando Calrissian is the President and General Manager of Bespin Corporation. Calrissian is paid a base salary, plus a bonus that is based on a percentage of the company's net income, provided the net income is greater than a predetermined amount. Construction of the gas mine was financed by a loan from the Imperial Bank. The loan carries a requirement that the company maintain a debt-to-equity ratio no greater than 60:40 (i.e. no greater than 60% debt), otherwise the loan will be considered in default. As with all companies in the oil and gas industry, Bespin faces considerable pressure from environmental groups to mine and refine tibanna gas in the most environmentally sustainable way possible, given current technology.

Bespin's fiscal year end is approaching. Calrissian has just finished a meeting with his Chief Financial Officer, Jabba T. Hutt. Hutt has advised Calrissian that a major piece of mining equipment has developed a flaw. The equipment is still operating, but at 80% of its normal efficiency. Repairing the machine, and returning it to full capacity, will be very expensive (although Bespin would still be able to meet its net income targets for the year). Even operating the equipment at 80% capacity will still allow the mine to operate and meet its net income targets. However, the damage to the equipment is causing it to spew toxic gas into the atmosphere while it operates, although it would take several months for the toxic gas to have a long-term damaging effect on the environment. Calrissian has to decide whether to repair the equipment now, or wait and repair it later.

1). Positive accounting theory describes three hypotheses for typical management behavior. Identify and briefly describe these three hypotheses.

2). Applying your knowledge of positive accounting theory, which action do you believe Calrissian will take? Identify which hypothesis you believe Calrissian's anticipated behavior is being illustrated here