Now heather was working on the current annual report, and the earnings had declined. preliminary calculations showed earnings per share somewhere around $9. earnings had declined because of defaulted contracts from the two large dealers who had gone bankrupt. keel had completely financed the contracts for these dealers because of their previous excellent credit history. now keel was on the hook for a whole fleet of custom recreational vehicles without buyers.

considering the issue of the drop in the earnings, yvonne asked heather to find a way to report stable earnings. she was concerned that cathy might respond negatively to the decline in earnings and complicate the relationship. heather considered various options:

increase the estimated percentage of completion on all custom recreational vehicles in work-in-process inventory by 15 percent. this would erase most of the loss. she could justify this because she always felt that work-in-process estimates had been conservative.

recognize revenue on the fleet of custom recreational vehicles in default. it would be difficult to sell them quickly at a good price, but she could argue that they could be sold. it would be best to find new buyers for them, but that could take well over a year.

switch to mark-to-market accounting for some of the recreational vehicles in progress so the company could recognize all of the profit when contracts with other clients are signed.

1.are any of the options that heather is considering acceptable under generally accepted accounting principles? why or why not?

2.do any of the options being considered by heather constitute financial statements fraud?

3. how would you handle the entire situation if you were in heather’s position?