The Marvin Company is a subsidiary of Hughes Corp. The controller believes that Marvin's yearly allowance for doubtful accounts should be 8% of gross accounts receivable. Given the recession and the high-interest rate environment, the president, nervous that the parent company might expect the subsidiary to sustain its 10% growth rate, suggests that the controller increase the allowance for doubtful accounts to 9%. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for the Marvin Company.

Questions:

• In a recessionary environment with tight credit and high-interest rates:
  • Identify steps Marvin Company might consider to improve the accounts receivable situation.
  • Then evaluate each step identified in terms of the risks and costs involved.
• Should the controller be concerned with Marvin Company's growth rate in estimating the allowance? Explain your answer.
• Does the president's request pose an ethical dilemma for the controller? Give your reasons.