CA16-2 ETHICS (Ethical Issues--Compensation Plan) The executive officers of Rouse Corporation have a performance-based compensation plan. The performance criteria of this plan is linked to growth in earnings per share. When annual EPS growth is 12%, the Rouse executives earn 100% of the shares; if growth is 16%, they earn 125%. If EPS growth is lower than 8%, the executives receive no additional compensation. In 2014, Joan Devers, the controller of Rouse, reviews year-end estimates of bad debt expense and warranty expense. She calculates the EPS growth at 15%. Kurt Adkins, a member of the executive group, remarks over lunch one day that the estimate of bad debt expense might be decreased, increasing EPS growth to 16.1%. Devers is not sure she should do this because she believes that the current estimate of bad debts is sound. On the other hand, she recognizes that a great deal of subjectivity is involved in the computation. Instructions Answer the following questions. (a) What, if any, is the ethical dilemma for Devers? (b) Should Devers's knowledge of the compensation plan be a factor that influences her estimate? (c) How should Devers respond to Adkins's request?
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Q 1) The ethical dilemma is pretty straight forward ,she can simply decrease the estimate of bad debts expense leading to increased compensation.
Q 2) No her knowledge of compensation should not be a factor to influence her estimate.Bad debt expenses should be based on best estimate of accounts which are considered to be uncollectible instead of compensation being the guiding factor.
Q 3) She can let Adkins know that the bad debts expense calculation is based on best possible estimate and she feels that the calculation is pretty sound and reasonable.
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