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Question 1 1 pts Belco Industries produces and distributes industrial chemicals. Belco's earnings increased sharply last year, and bonuses were paid to the management staff for the first time in several years. Bonuses are based in part on the amount by which reported profit exceeds budgeted profit. Jim Kern, the finance director, was pleased with Bolco's earnings and thought that the pressure to show, financial results would ease. However, Ellen North, Belco's managing director, told Kern that she saw no reason why this year's bonuses should not be double those of last year. As a result, Kern telt g eat pressure to increase reported profit well above the budgeted profit. This would assure increased bonuses. Kern met with Bill Keller of Pristeel Led, which supplied most of the company's manutacturing supplies and small equipment. Kern and Keller have been close business contacts tor many years. Kem asked Keller to invoice all Belco's purchases of perishable supplies as equipment. Kern told Keller tha Belco's managing director had imposed stringent budget constraints on operating costs but not on capital expenditures. Keller agreed to do as Kern had asked. Kern planned to capitalise the purchase of perishable supplies and include them with the equipment, account on the balance sheet. This way, Kern could defer the full expense recognition tor these items to later years. This would increase reported profits, leading to increased bonuses. While analysing the financial statements for the second quarter of the current year. Gary Wood Belco's accountant, noticed a large decrease in the cost of supplies compared with that of last year. Wood reviewed the supplies account and noticed that very few supplies had been purchased from Pristeel, a major source of supplies. However, there had been large purchases of equipment from Pristeel. Wood, who reports to Kern, immediately brought this to Kern's attention. Kern told Wood of North's high expectations and of the arrangement made with Bill Keller of Pristeel. Wood told Kern tha his action was an improper accounting treatment for the supplies purchased from Pristeel. Wood requested that he be allowed to correct the accounts and urged that the arrangement with Pristeel be discontinued. Kern refused the request and told Wood not to become involved. After clarifying the situation in a confidential discussion with an objective and qualified peer within Belco, Wood arranged to meet with North, Belco's managing director. At the meeting, Wood disclosed the arrangement Kern had made with Pristeel. Required: 1. Explain why the use of alternative accounting methods to manipulate reported earnings is unethical. 2. Is Gary Wood, Belco's accountant, correct in saying that the supplies purchased from Pristeel were accounted for improperly? Explain your answer. 3. Discuss whether the actions of Gary Wood, Belco's accountant, were appropriate or inappropriate