Reference no: EM131379981

"Yeah, I know all of the details weren't completed until January 2, 2014, but we agreed on the transaction on December 30, 2013. By my way of reasoning, it's a continuation transaction and the $12 million revenue belongs in the results for 2013." This comment was made by Carl Land, the CFO of Family Games, Inc. The company has annual sales of about $50 million from a variety of manufactured board and electronic games that are designed for use by the entire family.

However, during the past two years, the company reported a net loss due to cost-cutting measures that were necessary to compete with overseas manufacturers and distributors. Land made the previous comment to Helen Strom, the controller of Family Games, after Strom had expressed her concern that because the lawyers did not sign off on the transaction until January 2, the revenue should not be recorded in 2013. Strom emphasized that the product was not shipped until January 2 and there was no way of justifying its inclusion in the previous year's operating results. Land felt that Strom was being hypertechnical because the merchandise had been placed on the carrier (truck) on December 31, 2013. The items weren't shipped until January 2 because of the holiday.

"Listen, Helen, this comes from the top," Land said. "The big boss said we need to have the $12 million recorded in the results for 2013." "I don't get it," Helen said to Land. "Why the pressure?" "The boss wants to increase his performance bonus by increasing earnings in 2013. Apparently, he lost some money in Vegas over the Christmas weekend and left a sizable IOU at the casino," Land responded. Helen shook her head in disbelief. She didn't like the idea of operating results being manipulated based on the personal needs of the CEO. She knows that the CEO has a gambling problem. This sort of thing had happened before. The difference this time is that it has the prospect of affecting the reported results, and she is being asked to do something that she knows is wrong. "I can't change the facts," Helen said "All you have to do is backdate the sales invoice to December 30, when the final agreement was reached," Land responded.

"As I said before, just think of it as a revenuecontinuation transaction that started in 2013 and, but for one minor technicality, should have been recorded in 2014." "You're asking me to ‘cook the books,' " Helen said. "I won't do it." "I hate to play hardball with you, Helen, but the boss authorized me to tell you he will stop reimbursing you in the future for child care costs so that your kid can have a live-in nanny 24-7 unless you are a team player on this issue.

Remember, Helen, this is a one-time request only." Land said. Helen was surprised by the threat and dubious of the "one-time-event" explanation. She sat down and reflected on the fact that the reimbursement payments for her child care were $35,000, 35 percent of her annual salary. She is a single working mother. Helen knows that there is no other way that she can afford to pay for the full-time care needed by her autistic son.

Questions

1. Briefly discuss the rules for revenue recognition in accounting.

2. Assume Carl Land is a CPA and Helen Strom holds the Certificate in Management Accounting (CMA). What ethical issues exist for them in this situation? Identify the stakeholders in this case and Strom's ethical obligations to them.

3. To what extent should Helen consider the gambling problems of her boss in deciding on a course of action? To what extent should Helen consider her child care situation.