Ethics Case 18–8

The Swiss label maker; value of shares issued for equipment

Bricker Graphics is a privately held company specializing in package labels. Representatives of the firm have just returned from Switzerland, where a Swiss firm is manufacturing a custom-made high speed, color labeling machine. Confidence is high that the new machine will help rescue Bricker from sharply declining profitability. Bricker’s chief operating officer, Don Benson, has been under fire for not reaching the company’s performance goals of achieving a rate of return on assets of at least 12%.

The afternoon of his return from Switzerland, Benson called Susan Sharp into his office. Susan is Bricker’s Controller.

Benson: I wish you had been able to go. We have some accounting issues to consider.

Sharp: I wish I’d been there, too. I understand the food was marvelous. What are the accounting issues?

Benson: They discussed accepting our notes at the going rate for a face amount of $12.5 million. We alsodiscussed financing with stock.

Sharp: I thought we agreed; debt is the way to go for us now.

Benson: Yes, but I’ve been thinking. We can issue shares for a total of $10 million. The labeler is custommade and doesn’t have a quoted selling price, but the domestic labelers we considered went

for around $10 million. It sure would help our rate of return if we keep the asset base as low as

possible.

Required:

1. How will Benson’s plan affect the return measure? What accounting issue is involved?

2. Is the proposal ethical?

3. Who would be affected if the proposal is implemented?