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Bonus temptation
Rick Pines and Joe Lopez are the plant managers for High Mountain Lumber’s particle board
division. High Mountain Lumber has adopted a just-in-time management philosophy. Each plant
combines wood chips with chemical adhesives to produce particle board to order, and all product
is sold as soon as it is completed. Laura Green is High Mountain Lumber’s regional controller. All
of High Mountain Lumber’s plants and divisions send Green their production and cost
information. While reviewing the numbers of the two particle board plants, she is surprised to find
that both plants estimate their ending Work-in-Process Inventories at 75% complete, which is
higher than usual. Green calls Lopez, whom she has known for some time. He admits that to
ensure their division would meet its profit goal and that both he and Pines would make their
bonus (which is based on division profit), they agreed to inflate the percentage completion. Lopez
explains, “Determining the percent complete always requires judgment. Whatever the percent
complete, we’ll finish the Work-in-Process Inventory first thing next year.”
Requirements
1. How would inflating the percentage completion of ending Work-in-Process Inventory help
Pines and Lopez get their bonus?
2. The particle board division is the largest of High Mountain Lumber’s divisions. If Green does
not correct the percentage completion of this year’s ending Work-in-Process Inventory, how will
the misstatement affect High Mountain Lumber’s financial statements?
3. Evaluate Lopez’s justification, including the effect, if any, on next year’s financial statements.