136a Case1 S10

136a Case1 S10 - in ongoing profitability and will discount...

Info iconThis preview shows page 1. Sign up to view the full content.

View Full Document Right Arrow Icon
Econ. 136A Case #1 Spring 2010 After a decade of consistent income growth, the Cranor Corporation sustained a before-tax loss of $8.4 million in 2009. The loss was primarily due to $10 million in expenses related to a product recall. Cranor manufactures medical equipment, including x-ray machines. The recall was attributable to a design flaw in the manufacture of the company’s new line of machines. The company controller, Jim Dietz, has suggested that the loss should be included in the 2009 income statement as an extraordinary item. “If we report it as an extraordinary item, our income from continuing operations will actually show in increase from the prior year. The stock market will appreciate the continued growth
Background image of page 1
This is the end of the preview. Sign up to access the rest of the document.

Unformatted text preview: in ongoing profitability and will discount the one-time loss. And our bonuses are tied to income from continuing operations, not net income.” The chief executive officer asked Jim to justify this treatment. “I know we have had product recalls before and, of course, they do occur in our industry,” Jim replied, “but we have never had a recall of this magnitude, and we fixed the design flaw and upgraded our quality control procedures.” Required: a. Discuss the ethical dilemma faced by Jim Dietz and the company’s chief executive officer. b. According to GAAP, explain how the loss should be accounted for in the financial statements. Be sure to justify your position. ANSWERS MUST BE TYPED AND LIMITED TO ONE PAGE....
View Full Document

This note was uploaded on 05/23/2010 for the course ECON 136A taught by Professor Anderson during the Spring '08 term at UCSB.

Ask a homework question - tutors are online