Question

Prophet Co. signed a long-term purchase contract to buy timber from the U.S. Forest Service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market value is $250 per thousand board feet. At this rate, the market price is $5,000,000. Jerry Herman, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Billie Hands, argues that the loss is temporary and should be ignored. Herman notes that market value has remained near $250 for many months, and he sees no sign of significant change. INSTRUCTIONS What are the ethical issues, if any? Is any particular stakeholder harmed by the financial vice president's decision? What should the controller do?

Answer 1

The ethical issue is that the financial vice president fraudulently agreed to pay $6,000,000 rather than the market price of $5,0000,000.

What are the ethical issues?

From the information given, the financial vice president fraudulently agreed to pay $6 million instead of the market price of $5 million for the timber.

This is unethical due to the fact that the financial manager may collude with the seller to rip off the company the extra $1 million.

b. Is any particular stakeholder harmed by the financial vice president's decision

The vice president’s financial decision affects the shareholders of the company.

This is because the vice president is reducing the profitability of the company and low profitability means low retained earnings.

The shareholders will be affected in terms of the reduced dividends earned due to the reduced retained earnings.

c) What the controller should do

The controller should then use professional due diligence and integrity on order to ensure transparency in the dealings.

He should therefore ensure that the company does not pay the $6 million that the financial president agreed to pay.

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