Hi-Lo Corporation is a publicly traded manufacturing company with a global presence. The company produces a range of consumer electronics and has a history of meeting or exceeding earnings expectations. The current financial year has been challenging due to increased competition, rising production costs, and fluctuations in currency exchange rates. Earnings Pressures and Executive Incentives 1. Earnings Expectations: As the end of the fiscal year approaches, High-Lo Corporation is facing pressure to meet market expectations for earnings per share (EPS). Analysts and investors have set high expectations for the company based on previous years' performance. 2. Executive Compensation Structure: The executive compensation structure at High-Lo Corporation includes significant bonuses tied to achieving specific financial targets, including meeting or exceeding earnings projections. Executives, including the CFO and CEO, are aware that their bonuses are directly linked to the reported earnings. 3. Challenges Faced: Throughout the year, High-LO Corporation encountered challenges such as increased production costs (unit cost of inventory has been increasing) due to supply chain disruptions and unfavorable currency exchange rates. These challenges have put significant pressure on the company's profit margins. The following financial statements and additional information are available for Hi-Lo Corporation at the end of 2020. Hi-Lo CORPORATION Income Statement For the Year Ended December 31, 2020 Sales Revenue $ 1,224,600 Cost of goods sold (802,200) Gross profit 422,400 Expenses Depreciation Expenses -equipments (58,000) Depreciation Expenses -building Wages and slaries expense Bad debt expenses Total Expenses Income before taxes Tax expense (30%) Net Income (12,000) (59,000) (66,110) (195,110) 227,290 (68,187) $ 159.103 Hi-Lo CORPORATION Statement of Financial Position As of December 31, 2020 Current Liabilities 1 Current Asset Cash $ 3,714,000 Accounts Payable Accounts Receivable 661,100 Taxes payable Less: Allowance for Doubtful Accounts (66,110) Dividends payable Accounts receivable, Net 594,990 Wages and salaries payable Inventories 542,800 Total Current Assets 4,851,790 Total Current Liabilities $ 60,500 68,187 35,000 59,000 222,687 Noncurrent Asset Noncurrent Liabilities Equipment 320,000 Less: Accumulated depreciation, Equipment Equipments, Net (58,000) Total Liabilities 222,687 262,000 Stockholders' Equity Building 245,000 Common Stock ($1 par value) 100,000 Less: Accumulated depreciation (12,000) Additional paid-in capital, Common 4,900,000 Building, Net 233,000 Retained Earnings Total noncurrent assets 495,000 Total Stockholders Equity 124,103 5,124,103 Total Assets $ 5,346,790 Total Liabilities and Stockholders' Equity $ 5,346,790 Additional information a. During the year-end audit, it was discovered that a September 1, 2020, transaction for the lump-sum purchase of a hydraulic lift and a trailer was not recorded. The fair market values of the hydraulic lift and the trailer were $350,000 and $97,000, respectively. Each asset has an expected useful life of 8 years with no salvage value. The purchase of assets was financed by issuing a $420,000 five-year promissory note directly to the seller. Interest of 10 percent is payable annually on August 31 of every year. Hi-Lo uses straight-line method to depreciate all of its assets. Hi-Lo decides to use a new depreciation method for the hydraulic lift and the trailer. b. During the year-end audit, Hi-Lo was suggested to change way bad debts were estimated. Hi-Lo currently uses the percentage of accounts receivable method (10% of 661,100), but will have to revise its estimated bad debt expense using the aging of accounts receivable method. The information pertaining to the accounts receivable is given below: DV Farmer JJ Joysen Due date January 17, 2021 July 30, 2020 June 12, 2020 Amount ($) 126,500 89,200 NJ Bell 53,600 JC Net 232,800 October 19, 2020 Noell Store 63,000 December 14, 2020 Johnston Supplies 96,000 September 28, 2020 Total 661,100 Age Category % Bad Debt (Number of Days Unpaid) 1-30 31-90 5 20 91-120 35 Over 120 235 50 2 c. Hi-Lo unintentionally omitted the record of the issuance of preferred stock and repurchase of treasury stock transaction. On March 1, 2020, the company issued 10,000 shares of 5%, $15 par value preferred stock at a price of $60 per share. In addition, Hi-Lo repurchased its common stock 25,000 shares on June 12 at a price of 40 per share and subsequently sold 15,000 shares of the treasury stocks to the market at a price of $50 per share on November 15, 2020. The total dividend declared was 35,000 (already adjusted on the financial statement, as seen in Dividends payable). d. Below is the information on the beginning inventory, purchases and sales for the company for the year. Currently, Hi-Lo uses the perpetual FIFO method to value its inventory and cost of goods sold. However, Hi-Lo decided to change the costing method. Adjust the inventory and cost of goods sold to reflect the change. Date 1-Jan Description # of Units Unit Cost or Selling Price Beginning inventory 6,000 $47 2-Mar Sale 2,600 63 10-May Purchase 11,000 51 17-Jul Sale 9,600 78 28-Sep Purchase 5,000 54 10-Oct Sale 4,000 78 29-Nov Purchase 4,000 58 Required: 1. Given earnings pressure and executive incentives, as the CFO of High-Lo, what would be your accounting choices regarding 1) Depreciation, 2) Estimated bad debt, and 3) Inventory cost? Please prepare revised financial statements based on your accounting decisions. 2. Do you think your accounting choice is ethical*? Explain by analyzing the following. 2.1 The primary objective of financial statements 2.2 The negative and positive consequences or potential risks of your accounting choice on the following stakeholders. a. Investors/shareholders b. Creditors c. Employees