O Heading To: Heather Calderon or Mariah Dar, Senior Manager From: Date: Re: A general description of the issue(s) the memo addresses o O O Text. This should a) briefly describe the purpose of the memo, i.e., the issue that is being addressed and b) answer the questions. Consider the Easton textbook your source of authoritative guidance regarding US GAAP. 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 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 Q's Controller. Benson: I wish you had been able to go. We have some accounting issues to consider. 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: 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