Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin 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 Marvin Company.
(a) In a recessionary environment with tight credit and high interest rates:
1. Identify steps Marvin Company might consider to improve the accounts receivable situation.
2. Then evaluate each step identified in terms of the risks and costs involved.
(b) Should the controller be concerned with Marvin Company’s growth rate in estimating the allowance? Explain your answer.
(c) Does the president’s request pose an ethical dilemma for the controller? Give your reasons.