CA8.6 (LO 2) Ethics (Purchase Commitments) Prophet Company signed a long-term purchase contract to buy timber from the government forest service at $300 per thousand board feet. Under these terms, Prophet must cut and pay $6,000,000 for this timber during the next year. Currently, the market governmental price is $250 per thousand board feet. At this rate, the market price is $5,000,000.

Hu Cho, the controller, wants to recognize the loss in value on the year-end financial statements, but the financial vice president, Rondo Star, argues that the loss is temporary and should be ignored. Cho notes that market price has remained near $250 for many months, and he sees no sign of significant change.

Instructions

a. What are the ethical issues, if any?

b. Is any particular stakeholder harmed by the financial vice president’s decision?

c. What should the controller do?