Purchase Commitments'

CA 9-6 'Purchase Commitments'

See p. 521 in the text, 15 ed., {FASB Update ed.}

{it may be at a different, butnearby page in other versions of the 15 th ed.}

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Prophet Company signed a long-term purchase contract to buy timber from the U.S. 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 value is $250 per thousand board feet.

At this rate, the market price is $5,000,000. Jerry Herman, the controller, wants to recognize

the loss in valueon the year-end financial statements, but the financial vice president,Billie Hands, argues that the loss istemporary and should be ignored. Herman notes that

market value has remained near $250 for many months,and he sees no sign of significant

change.

Instructions:

(a) What are the ethical issues, if any?...Explain /Discuss your response

(b) Is any particular stakeholder harmed by the financial vice presidents decision?... Who is it ?/ Who are they ?

(c) What should the controller do?... WHY ??

***Two references need to be listed***