Marvin Company is a subsidiary of Hughes Corp.

  

(Bad-DebtReporting)Marvin Company is a subsidiary of Hughes Corp. The controller believes that the yearly allowance for doubtful accounts for Marvin should be 2% of net credit sales. 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 3% yearly. The president thinks that the lower net income, which reflects a 6% growth rate, will be a more sustainable rate for Marvin Company.

Instructions

^{(a)In arecessionary environment with tight credit and high interest rates:}

^{(1)Identify steps Marvin Company might consider to improve the accountsreceivable situation.}

^{(2)Then evaluate each step identified in terms of the risks and costs involved.}

^{(b)ShouldthecontrollerbeconcernedwithMarvinCompany’sgrowthrateinestimatingtheallowance?}

^{Explain your answer.}

(c)Does the president’s request pose an ethical dilemma for the controller? Give your reasons.