ResnickGraphics is a privately held company specializing in packaging labels.Firm management has just returned fromEurope where aEuropean firm is manufacturing a custom-made high speed, color labeling machine.Confidence is high that the new machine will help rescueResnickfrom sharply declining profitability.Resnick'schief operating officer, Dan Brickleyhas 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,Brickleycalled Sharon Smith, the controller, into his office.

Brickley: I wish you had been able to go.We have some accounting issues to consider.

Smith: I wish I had been there too.What are the accounting issues?

Brickley: They discussed accepting our notes at the going rate for a face amount of $12.5 million.We also discussed financing with stock.

Smith: I thought we agreed; debt is the way to go for us now.

Brickley: Yes, butI'vebeen thinking.We can issue shares for a total of $10 million.The labeler is custom made anddoesn'thave a quoted selling price, but the domestic labors we considered went for around $10 million.It would help our rate of return if we keep the asset base as low as possible.

Required:

1. How willBrickley'splan affect the return measure?
2. What accounting issue is involved.
3. Is the proposal ethical?Why or why not?
4. Who would be affected if the proposal is implemented?