Tsogang Incorporated is a medium-sized property company. It

Tsogang  Incorporated is a medium-sized property company. It was founded five years ago by its two principal shareholders ,Moriti and Lesedi Tsogang . Moriti is Managing Director of the company, and Lesedi is the Sales Director. Tsogang has enjoyed tremendous growth since it’s inception by aggressively seeking out listings for Residential Property and paying a generous commission to the Estate Agents.

The company receives a 6% commission for selling a client’s property and gives two-thirds of this, or 4% of the selling price, to the Estate Agent. For example, if a house sells for R100,000, Tsogang receive R6,000 and pays R4,000 of this to the Estate Agent. At the time of the sale, the company records a debit of R6,000 to Accounts Receivable and a credit of R6,000 to Sales Revenue. The Accounts Receivable is normally collected within 30 days. Also, at the time of sale, the company debits R4,000 to Commissions Expense and credits Commissions Payable for the same amount.

Estate Agents are paid by the 15th of the month following the month of the sale. In addition to the commissions expense, Tsogang’s other two major expenses are advertising of listings in local newspapers and depreciation of the company’s fleet of Mercedes Benz cars. (Lesedi believes that all of the Estate Agents should drive Mercedes Benz cars.) The newspaper ads will run for one month, and the company has until the 10th of the following month to pay that month’s bill. The vehicles are depreciated over four years. (Lesedi doesn’t believe that any Estate Agent should drive a vehicle that is more than four years old.)

Due to a downturn in the economy of the country as a result of the COVID-19 pandemic, sales have been sluggish for the first 11 months of the current year, which ends on June 30. Moriti  is very disturbed by the slow sales this particular year because a large Promissory note to the local bank is due in July and the company plans to ask the bank to renew the note for another three years. Moriti seems less concerned by the unfortunate timing of the downturn and has some suggestions as to how he and Lesedi can “paint the rosiest possible picture for the banker” when they go for the loan extension in July. In fact, Moriti has some very specific recommendations for you as to how to account for transactions during June, the last month in the fiscal year.

You are the controller for Tsogang and have been treated very well by Moriti and Lesedi since joining the company two years ago. In fact, Moriti also insists that you drive the top-of-the-range Mercedes. Following are his suggestions:

First, for any sales made in June, we can record the 6% commission revenue immediately but delay recording the 4% commission expense until July, when the sales agent is paid. We record the sales at the same time we always have, the Estate Agents get paid when they always have, the bank sees how profitable we have been, we get our loan, and everybody is happy!

Second, since we won’t be paying our advertising bills for the month of June until July 10, we can wait until then to record the expense. The timing seems perfect since we are meeting with the bank for the loan extension on July 8.

Third, since we will be depreciating the fleet of “Mercs” for the year ending June 30, how about changing the estimated useful life on them to eight years instead of four years? We won’t say anything to the Estate Agents; no need to rile them up about having to drive their cars for eight years. Anyhow, the change to eight years would just be for accounting purposes. In fact, we could even switch back to four years for accounting purposes next year. Likewise, the changes in recognizing commission expense and advertising expense don’t need to be permanent either; these are just slight bookkeeping changes to help us get over the hump!

Required

Use the Ethical Decision Framework to complete the following requirements:

1. Recognize an ethical dilemma: Explain why each of the three proposed changes in accounting will result in an increase in net income for the year ending June 30. Identify any concerns you have with each of these proposed changes in accounting from the perspective of GAAP/IFRS. What ethical dilemma(s) do you now face? (8 marks)

2. Analyze the key elements in the situation:
   1. Who may benefit or be harmed? (1 mark)
   2. How are they likely to benefit or be harmed? (1 mark)
   3. What rights or claims may be violated? (1 mark)
   4. What specific interests are in conflict? (1 mark)
   5. What are your responsibilities and obligations? (1 mark)

3. List alternatives and evaluate the impact of each on those affected: As the controller, what are your options in dealing with the ethical dilemma(s) you identified in (1) above? Which provides the other investors and the bank with information that is most relevant, most complete, most neutral, and most free from error? (7 marks)

4. Select the best alternative: Among the alternatives, which one would you select? Explain your decision in the form of a memo (5 marks)