Harvest Day Corporation is a publishing company that produces trade magazines. The company’s shareholders are awaiting the announcement of Harvest Day’s earnings for the fiscal year, which ends on December 31.
Market analysts have predicted earnings to be around $1.34 per share. The CEO of Harvest
Day expects earnings to be only $1.20 per share, and knows this will cause the price of the stock to drop. The CEO suggests the following ideas to various managers to try to increase reported earnings by the end of the fiscal year:
a. Delaying recording of cancelled subscriptions for December until January.
b. Waiting until the new fiscal year to update the software on office computers.
c. Recognizing unearned subscription revenue (cash received in advance for magazines that will be sent in the future) as revenue when received in the current month (just before fiscal year end) instead of booking it as a liability.
d. Delaying recording purchases of office supplies on account until after year end.
e. Booking advertising revenues that relate to January in December.
f. Waiting until after fiscal year-end to do building repairs.
g. Switching from declining balance to straight line depreciation to reduce depreciation expense in the current year.
REQUIRED
1. Why would Harvest Day Corporation’s CEO want to “manage” earnings?
2. Which of the items in a–g above are acceptable to Harvest Day’s controller? Which are unacceptable?
3. What should the controller do about the CEO’s suggestions? What should the controller do if the CEO refuses to change the suggestions?