Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particleboard division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All of High Mountain Lumber’s plants and divisions send Green their production and cost information. While reviewing the numbers of the two particleboard plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, “Determining the percent complete always requires judgment. Whatever the percent complete, we’ll finish the Work-in-Process Inventory first thing next year.” Requirements How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus? The particleboard division is the largest of High Mountain Lumber’s divisions. If Green does not correct the percentage completion of this year’s ending Workin- Process Inventory, how will the misstatement affect High Mountain Lumber’s financial statements? Evaluate Lopez’s justification, including the effect, if any, on next year’s financial statements. Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green

FINANCIAL ACCOUNTING

10th Edition

ISBN:9781259964947

Author:Libby

Publisher:Libby

Chapter1: Financial Statements And Business Decisions

Section: Chapter Questions

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Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particleboard division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant combines wood chips with chemical adhesives to produce particle board to order, and all product is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All of High Mountain Lumber’s plants and divisions send Green their production and cost information. While reviewing the numbers of the two particleboard plants, she is surprised to find that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is higher than usual. Green calls Lopez, whom she has known for some time. He admits that to ensure their division would meet its profit goal and that both he and Pines would make their bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez explains, “Determining the percent complete always requires judgment. Whatever the percent complete, we’ll finish the Work-in-Process Inventory first thing next year.”

Requirements

How would inflating the percentage completion of ending Work-in-Process Inventory help Pines and Lopez get their bonus?
The particleboard division is the largest of High Mountain Lumber’s divisions. If Green does not correct the percentage completion of this year’s ending Workin- Process Inventory, how will the misstatement affect High Mountain Lumber’s financial statements?
Evaluate Lopez’s justification, including the effect, if any, on next year’s financial statements.
Address the following: What is the ethical issue? What are the options? What are the potential consequences? What should Green

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