Ethics Case

Q Graphics is a privately held company specializing in package labels. Representatives of the firm have just returned from Switzerland, where Swiss firm is manufacturing a custom-made high speed, color labeling machine. Confidence is high that the new machine will help rescue Q Graphics from sharply declining profitability. Qs chief operating officer, Don Benson, has been under fire for not reaching the companys 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 Qs Controller.

Benson: I wish you had been able to go. We have some accounting issues to consider. Sharp: I wish Id 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 Ive been thinking. We can issue shares for a total of $10 million. The labeler is custom made and doesnt 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:

1. How will Bensons plan affect the return measure? What accounting issue is involved? [Hint: A noncash transaction should be recorded at fair value. This should be the fair value of the consideration given or the asset (in this case) received.]

2. Is the proposal ethical?

3. Who would be affected if the proposal is implemented?