Your boss comes to you and asks you to defer recognizing certain expenses in this period by capitalizing the expenditures as a depreciable asset. It has been rumored that your branch of the company has been doing poorly and is on an internal list for possible closings. A closing of your branch would mean your boss, yourself and 20 others would lose their jobs. However, a good quarter could mean that another branch will be closed instead. You know the expenditure is not an asset.

Required:

Define the agent(s) and principal(s) in this problem.

Discuss the Agency problems associated with this dilemma.

Assume the accountants and managers at the other branches on the list are faced with the same dilemma.

What actions do you believe they will take regarding this problem? What type of assumption(s) are you making about them in predicting their behavior?

If it turns out that the branch will not be closed only that the manager may or may not receive a bonus, do your incentives and problems change? Does your answer?