Reference no: EM13939244

Vista Corporation, producer of computer software packages, began operations on January 1. It acquired financing from the issuance of common stock for $60,000,000 and long-term debt for $80,000,000. At the beginning of business operations, Vista produced the following projected income statement and balance sheet for the first year. All amounts are in thousands.

Vista Corporation
Projected Income Statement
First Year of Operations
Sales		$100,000
Expenses:
Warranty	$10,000
Depreciation	40,000
Research	20,000	70,000
Operating income before bonus		$ 30,000
Bonus		3,000
Operating income		$ 27,000
Interest expense		7,000
Income before taxes		$ 20,000
Income taxes (40%)		8,000
Net income		$ 12,000

Vista Corporation
Projected Balance Sheet
December 31 of First Year
Assets:
Cash	$ 30,000
Accounts receivable	24,000
Net computers	158,000
Total assets	$212,000
Liabilities & Shareholders' Equity:
Accounts payable	$ 50,000
Warranty payable	10,000
Long-term debt	80,000
Common stock	60,000
Retained earnings	12,000
Total liabilities and shareholders' equity	$212,000

The new president is rather disappointed with these projected results having just quit a job of which his compensation package was $4,000,000. After examining the forecasts of a bonus of only $3,000,000, the president decides to use his knowledge of financial statements to modify his bonus. He meets with the company's CFO the next day to see what could be done. He suggested the following possibilities that would boost the first year's income:

1. Slash research and development expenditures, which are paid in cash, from $20 million to $10 million.

2. Double the estimated life of the computers, which will decrease depreciation expense from $40 million to $20 million. Because identical accounting procedures are used for taxes, no deferred taxes will be generated. Taxes require immediate payment.

3. Reduce estimated warranty expense from 10% of sales to 7% of sales.

4. Any resultant change in the bonus of 10% of operating income before the bonus will be paid to the president in cash.

Following is the new income statement for Year 1 using the alternative accounting procedures and operating decisions.

(in thousands)

Sales		$100,000
Expenses:
Warranty	$ 7,000
Depreciation	20,000
Research	10,000	37,000
Operating income before bonus		$ 63,000
Bonus		6,300
Operating income		$ 56,700
Interest expense		7,000
Income before taxes		$ 49,700
Income taxes (40%)		19,880
Net income		$ 29,820

Compare the president's compensation if the changes are enacted with his current compensation. What are the ramifications of these changes on the future? Are the president's suggestions ethical?

Required:  Write a 5 - 7 page APA formatted paper that addresses the proposed changes and the future ramifications of those changes on the company, as well as the ethical issues related to the president proposing the changes.  Provide a minimum of three references.