The management of the Auto Parts Division of the Alicante Corporation receives a bonus if the divisions income achieves a specific target. For 2018 the target will be achieved by a wide margin.

Philomena Stuart, the head of the divisions management team, has asked Todd Berry, the controller of the division, to try to reduce this years income and bank some of the profits for future years.

Todd suggests that the divisions bad debt expense as a percentage of the gross accounts receivable balance for 2018 increase from 3% to 5%. He believes that 3% is the more accurate estimate but knows that both the corporations internal auditors as well as the external auditors allow some flexibility when estimates are involved.

• What would you advise Todd to do?
• Does Todds action affect earnings quality? If so, how?
• Is your advice affected by the attitude of the auditors?
• Does Todds proposal present an ethical dilemma? If so, describe the dilemma. If not, why not?
• Are there any citations in the FASB Codifications that could support your position?