Question:
After a decade of consistent income growth, the Cranor Corporation sustained a before-tax loss of $8.4
million in 2013. 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 2013 income
statement as an extraordinary item. “If we report it as an extraordinary item, our income from continuing
operations will actually show an increase from the prior year. The stock market will appreciate the
continued growth 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:
Discuss the ethical dilemma faced by Jim Dietz and the company’s chief executive officer.
Answer:
Discussion should include these elements.
Facts:
The company incurred $10 million in expenses related to a product recall. The company had
experienced product recalls in the past and they do occur in the industry. To show a profit from
continuing operations, Jim Dietz, the controller, wants to report the $10 million as an extraordinary loss,
rather than as an expense included in operating income. He tells the CEO that the company has never had
After a decade of consistent income growth, the Cranor Corporation sustained a before-tax loss of $8.4
million in 2013. 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 2013 income
statement as an extraordinary item. “If we report it as an extraordinary item, our income from continuing
operations will actually show an increase from the prior year. The stock market will appreciate the
continued growth 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:
Discuss the ethical dilemma faced by Jim Dietz and the company’s chief executive officer.
Answer:
Discussion should include these elements.
Facts:
The company incurred $10 million in expenses related to a product recall. The company had
experienced product recalls in the past and they do occur in the industry. To show a profit from
continuing operations, Jim Dietz, the controller, wants to report the $10 million as an extraordinary loss,
rather than as an expense included in operating income. He tells the CEO that the company has never had
