Question
Horizon Corporation manufactures personal computers. The company began operations in 2012 and reported profits for the years 2012 through 2019. Due primarily to increased competition
Horizon Corporation manufactures personal computers. The company began operations in 2012 and reported profits for the years 2012 through 2019. Due primarily to increased competition and price slashing in the industry, 2020s income statement reported a loss of $20 million. Just before the end of 2021 fiscal year, a memo from the companys chief financial officer to Jim Fielding, the company controller, included the following comments. If we dont do something about the large amount of unsold computers already manufactured, our auditors will require us to write them off. The resulting loss for 2021 will cause a violation of our debt covenants and force the company into bankruptcy. I suggest that you ship half of our inventory to J.B. Sales, Inc., in Oklahoma City. I know the companys president and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021 which will boost our lost to a profit. Then J.B. Sales will simply return the merchandise in 2022 after the financial statements have been issued.
1. Understand the reporting effect: What is the effect on income before taxes of the sales transaction requested by the CFO?
2. Specify the options: If Jim does not record the sales transaction requested by the CFO, what is the effect on total assets and income before taxes of the inventory write-down?
3. Identify the impact: Are investors and creditors potentially harmed by the CFOs suggestion?
4. Make a decision: Should Jim follow the CFOs suggestion?
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