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, 2020's income statement reported a loss of $20 million. Just before the end of the 2021 fiscal year, a memo from the company's chief financial office (CFO) to Jim Filed, the company controller, included the following comments. If we don't do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write-down. 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 company's president, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021which will boost our loss to a profit. Then J.B. Sales will simply return the inventory in 2022 after the financial statements have been issued. Answer the following questions (either with a video or written). 1. What is the effect of this transaction, requested by the CFO, on net income? 2. If Jim does not record the sales transaction requested by the CFO, what is the effect on total assets and net income of the inventory write-down? 3. Are investors and creditors potentially harmed by the CFO's suggestion? 4. should Jim follow the CFO's suggestion? Support your answer with accounting. 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, 2020's income statement reported a loss of $20 million. Just before the end of the 2021 fiscal year, a memo from the company's chief financial office (CFO) to Jim Filed, the company controller, included the following comments. If we don't do something about the large amount of unsold computers already manufactured, our auditors will require us to record a write-down. 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 company's president, and he will accept the inventory and acknowledge the shipment as a purchase. We can record the sale in 2021which will boost our loss to a profit. Then J.B. Sales will simply return the inventory in 2022 after the financial statements have been issued. Answer the following questions (either with a video or written). 1. What is the effect of this transaction, requested by the CFO, on net income? 2. If Jim does not record the sales transaction requested by the CFO, what is the effect on total assets and net income of the inventory write-down? 3. Are investors and creditors potentially harmed by the CFO's suggestion? 4. should Jim follow the CFO's suggestion? Support your answer with accounting
