Chapter 5, Problem 5.77EIC

Strasburg Loan Company is in the consumer loan business. Strasburg borrows from banks and loans out the money at higher interest rates. Strasburg’s bank requires Strasburg to submit quarterly financial statements to keep its line of credit. Strasburg’s main asset is Notes Receivable. Therefore, Uncollectible-Account Expense and Allowance for Uncollectible Accounts are important accounts for the company.

Raquel Lanser, the company’s owner, prefers that net income reflect a steady increase in a smooth pattern, rather than an increase in some periods and a decrease in other periods. To report smoothly increasing net income, Lanser underestimates uncollectible-account expense in some periods. In other periods, Lanser overestimates the expense. She reasons that the income overstatements roughly offset the income understatements over time.

Requirements

1. 1. What is the ethical issue in this situation?
2. 2. Who are the stakeholders? What are the possible consequences to each?
3. 3. Analyze the alternatives from the following standpoints: (a) economic, (b) legal, (c) ethical.
4. 4. What would you do? How would you justify your decision?