Bricker Graphics is a privately held company specializing in package labels. Representatives of the firm have just returned from Switzerland, where a Swiss firm is manufacturing a custom-made high speed, color labeling machine. Confidence is high that the new machine will help rescue Bricker from sharply declining profitability. Bricker's chief operating officer, Don Benson , has been under fire for not reaching the company's performance goals of achieving a rate of return on assets of at least 12%. The afternoon of his return from Switzerland, Benson called Susan Sharp into his office. Susan is Bricker's Controller.

Benson: I wish you had been able to go. We have some accounting issues to conside

Sharp: I wish I 'd been there, too. I understand the food was marvelous. What are the accounting issues?

Benson: They discussed accepting our notes at the going rate for a face amount of $12.5 million. We also discussed financing with stock.

Sharp: I thought we agreed; debt is the way to go for us now.

Benson: Yes, but I've been thinking. We can issue shares for a total of $10 million. The labeler is custom made and doesn't have a quoted selling price, but the domestic labelers we considered went for around $ 10 million. It sure would help our rate of return if we keep the asset base as low as possible.

Required:

I . How will Benson' s plan affect the return measure? What accounting issue is involved?

2. ls the proposal ethical?

3. Who would be affected if the proposal is implemented