Marvin Company is a subsidiary of Hughes Corp The controller

Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 2% of net credit sales. 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 3% yearly. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.

Instructions

(a) In a recessionary environment with tight credit and high interest rates:

(1) Identify steps Marvin Company might consider to improve the accounts receivable situation.

(2) Then evaluate each step identified in terms of the risks and costs involved.

(b) Should the controller be concerned with Marvin Company\'s growth rate in estimating the allowance? Explain your answer.

(c) Does the president\'s request pose an ethical dilemma for the controller? Give your reasons.

Solution

A.

(1)

Some of the ways by which the company can improve its account receivable are as following:

(2)

Some of the risk and cost associated with each alternative are:

B.

Yes, the controller must be concerned with Marvin Company\'s growth rate in estimating the allowance. The growth rate represents how well the company is doing in terms of generating the revenue. If the rate is low it means that the revenues are low. One of the reasons might be that that the creditors of the company are paying up well and the accounts receivable has been increasing for the company. Moreover, if the company wants to grow rapidly by doing credit sales, then it should accept that the doubtful debt account will also increase.

C.

No, the president\'s request does not pose an ethical dilemma for the controller as the president\'s request is pragmatic and given the recessionary conditions it might be difficult for them to generate the revenues