ACC 1 D9

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Northeastern University *

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Economics

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Feb 20, 2024

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Uploaded by SuperHumanWillpowerHeron34

Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 8% of gross accounts receivable. Given the recession and the high-interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company. Instructions: 1. Should the controller be concerned with Marvin Company's growth rate in estimating the allowance? Explain your answer. 2. Does the president's request pose an ethical dilemma for the controller? Give your reasons. 1) Indeed, when evaluating the allowance, the controller must consider Marvin Company's growth rate. The growth rate indicates how well the business has been doing in terms of revenue generation. If it is low, the revenues are also low. One of the explanations could be that the business's creditors are paying on time, and the business's accounts receivable have been growing. Furthermore, if the business wishes to expand quickly through credit sales, it must expect that the account of doubtful debt would rise as well. So, if the business is expected to expand at a faster pace, it must forecast more bad debts and a larger allowance for doubtful accounts. They can have rigorous policies in place to reduce the number of doubtful accounts 2) No, the president's request doesn't really raise an ethical challenge for the controller because it is realistic. Given the current economic situation ( recession), it may be challenging for them to produce revenues. Moreover, the controller should not be disturbed by the President's requests because he knows exactly how the limit must be established. He can define the boundaries while keeping all the parameters in consideration and adhering to the guidelines.

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