Question

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 a ccounts 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.

Instructions

(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.

Answer 1

Marvin might consider to improve the  account receivable situation under recession time , tight credit growth and high interest market ---

Manage receivable . collection plan under recession time –

During recession time , mainly relates to collection , manage receivable always a tough challenge . In market normally flow of money got disturbed and companies badly impacted by negative cash flow and working capital issue .

In this situation company has to ensure that potential client should be financially healthy . To check their heath , company need to do credit application , personal guarantee signed , received business credit analysis .

Company has to do preemtive research before extended credit terms and conditions to possible new client . they have to do regular financial health check up for existing customer.

In case of every new potential customer need to complete and sign credit application. Company needs to review credit terms and condition in details

Company has to do complete follow up once past due day get over . If they can not collect money after certain age period , like 90 days , company can charge Interest for the same .

Company along with above step also need to be aggressive in negotiation payment terms with customers = Company can opt for prompt pay discount for early settlement

Company sometime offering a payment plan to late paying customers in certain situation .Company will discuss with critical customer and make a collection plan like – exactly how much money they will pay now , any deferral payment plan , Interest cost involvement etc.

Sometime it is very difficult to collect money from couple of big ticket customer after followed so many step , then company can appoint one Collection agent or do factoring ( through bank) to collect money

Should the controller be concerned with Marvin Company's growth rate in estimating the allowance

During recession time , Company ( Marvin) should focus on cash management , working capital management . To continue business , they definitely increase revenue growth and bring new customer under revenue bracket but most important to ensure that growth of revenue , business should no burn cash later on . Normally during recession time , they need to do more credit chekinh , credit worthiness , payment plan status of customer + new customer , market share, value etc to do more business .

At present , controller of parent company expects that t=yearly allowance of doubtful debt of Marvin approx 8% of gross account receivable . President of Marvin get nervous and he is under thought that may be parent company increase doubtful debt allowance % from 8-9% , in case of increase in revenue growth of 10% .

As explained above revenue growth definitely important for company to earn more profit but they should not burn cash or they should not face any collection challenge from existing and new customer .They ensure that all cash flow in place and they can manage working capital in a positive way

Does the president's request pose an ethical dilemma for the controller? Give your reasons.

Ethical dilemma – this is also called ethical paradox or moral dilemma . Thsis dilemma normally appear while making any business decision between two possible options . It is not easy to find any immediate solution relates to ethical dilemma . In this situation , revenue growth and % increase in debt allowance both are very close matter and sensitive . Company need to grow and they have to do more business and risk with new player in the market . On other side controller is planning to increase debt allowance % ( 8-9%) in case of growth increase by 10% . President are not confident about collection , cash flow positivity . Due to this reason , he does not want to increase growth , he is under impression taht may be revenue growth will not enough to cover doubtful allowance and impact subsidiary company margin .

In this situation ,company needs to select alternative that offers the greater good.