Deacon Publishing House is a publishing company that produces consumer magazines. The house and home division, which sells home-improvement and home-decorating magazines, has seen a 20% reduction in operating income over the past nine months, primarily due to the recent economic recession and the depressed consumer housing market. The division’s Controller, Todd Allen, has felt pressure from the CFO to improve his division’s operating results by the end of the year. Allen is considering the following options for improving the division’s performance by year-end:
a. Cancelling two of the division’s least profitable magazines, resulting in the layoff of twenty-five employees.
b. Selling the new printing equipment that was purchased in January and replacing it with discarded equipment from one of the company’s other divisions. The previously discarded equipment no longer meets current safety standards.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be delivered in the future) as revenue when cash is received in the current month (just before fiscal year end) instead of showing it as a liability.
d. Reducing the division’s Allowance for Bad Debt Expense. This transaction alone would increase operating income by 5%.
e. Recognizing advertising revenues that relate to January in December.
f. Switching from declining balance to straight line depreciation to reduce depreciation expense in the current year.
1. What are the motivations for Allen to improve the division’s year-end operating earnings?
REQUIRED:
2. From the point of view of the ?oStandards of Ethical Behavior for Practitioners of Management Accounting and Financial Management,?? Exhibit 1-7 on page 16, which of the preceding items (a–f) are acceptable? Which are unacceptable?
3. What should Allen do about the pressure to improve performance?