Question

Charlie Brown, controller for Kelly Corporation, is preparing the company’s income statement at year-end. He notes that the company lost a considerable sum on the sale of some equipment it had decided to replace. Since the company has sold equipment routinely in the past, Brown knows the losses cannot be reported as an unusual item. He also does not want to highlight it as a material loss since he feels that will reflect poorly on him and the company. He reasons that if the company had recorded more depreciation during the assets’ life, the losses would not be so great. Since depreciation is included among the company’s operating expenses, he wants to report the losses along with the company’s operating expenses, were he hopes it will not be noticed. Required: In your position as Chief Financial Officer of Kelly Corporation, prepare a memo to Charlie Brown and address the following: 1. The ethical issues you both face. 2. The major stakeholders involved and state how the stakeholders would be affected by the course of action order by Charlie Brown. 3. Explain why you believe the course of action proposed by Charlie Brown is ethical or unethical. 4. Explain the proper accounting treatment and support your answer with appropriate authoritative citation.

memo format require

Answer 1

Dear Kelly,

I would like to tell you that the situation we are facing regarding the loss on sale of equipment demands our attention. Your proposal to record more depreciation and categorize it as operating expenses doesnt seem right. It amounts to misleading the stakeholders of the company and dressing up the financial statements.

The major stakeholders involved in this scenario are our shareholders and potential investors. They will be mislead by this categorization and assume that are operating expenses are generally high which is not right.

This action is not ethical as it conceals the substance of the transaction undertaken. The loss should be reported as a separate line item as "loss on sale of asset". This will be appropriate as it will show the true nature of the loss.

Regards,

CFO