Question

CA9.7  

(LO 3 ) (Purchase Commitments) Prophet Company 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

a.  

What are the ethical issues, if any?

b.  

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

c.  

What should the controller do?

Answer 1

a. Few ethic issues are as follows.

Even though the contract is for a long term purchase contract, the payment should be payed as a one time payment which results in a huge cash outflow for the company in the next year.

The Market Value of the timber was $ 250 for many months,but the contract entered was for a high price $300

,

b. Stakeholders are not harmed by the financial vice president's decision. The actual payments are pending. so the effect will not affect Stakeholders

c. The Controller should take necessary steps to rewrite the contract agreement with U.S Forest Service as the market price is less than the contract price.