Medical Teks provides services to physicians including research assistance, diagnosis coding and medical practice software including an advanced medical record cross-referencing system. MT is aggressive in monitoring other firms' offerings and ensuring that its services are comparable to all others.
Because of its need to stay abreast of new product offerings, MT spends a lot of money sending professionals to trade shows. In addition, MT has agreements with several clients whereby the client requests a presentation of a competitor's services. An MT employee poses as an employee of the client's office and attends the presentation, obtaining as much data and sample information as possible. The cost of the travel and attending presentations is charged to Product Development and expensed during the current year.
In May of this year, MT began selling a software product substitute before the competitor's software was released. The competitor, National Tech Med, sued for copyright infringement and won. MT had to withdraw its product from the market and pay $1.5 million in damages. MT immediately negotiated an agreement with National Tech Med to sell National Tech Med's product (since it was prohibited from offering its own version for five years.) This agreement cost an additional $1.3 million, but it allowed MT to continue to offer a full line of services.
MT's accountant, Sam, initially recorded the cash payments as "Loss from Lawsuit" and "Product Development," respectively. However, Tom, the controller, instructed Sam to create an intangible asset, named "Goodwill" and charge both costs to this account. "We're protected from another lawsuit as long as this agreement is in effect," he says. "It's about as close to goodwill as we'll ever get from our competitors. We might as well amortize the cost rather than take the full hit to income, anyway."
- Why is it an ethical issue to change "Loss from Lawsuit" and "Product Development" to a "Goodwill" Acct.
- What are the ramifications to this action?
- Who/what will be effected by this action.
- What acct can "Loss from Lawsuit" and "Product Development" be changed to besides the "Goodwill" acct?