Bud Lighting Co. is a retailer of commercial and residentail lighting products. Gowen Geter, the company’s chief accountant, is in the process of making year-end adjusting entries for uncollectible accounts receivable. In recent years, the company has experienced an increase in accounts that have become uncollectible. As a result, Gown beleives that the company should increase the percentage used for estimating doubtful accounts from 2% to 4% of credit sales. This change will significantly increase bad debt expense, resulting in a drop in earnings for the first time in company history. The company president, Tim Burr, is under considerable pressure to meet earnings goals. He suggest that this is “not the right time” to change the estimate. He instructs Gowen to keep the estimate at 2%. Gowen is confident that 2% is too low, but he follows Tim’s instructions.
Required: (3-4 sentences each)
1. Discuss the decision to use the lower percentage to improve earnings. How does this work?
2. Is Tim acting in an ethical manner?
3. What other measures could the company president use to ensure the percentage of uncollectible accounts remains close to 2%?