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Tulsa Chemical Company (TCC) produces and distributes industrial chemicals, TCC s earnings increased sharply in 20x1, and bonuses were paid to the management staff for the first time in several years. Bonuses are based in part on the amount by which reported income exceeds budgeted income. Jim Kern, vice president of finance, was pleased with TCC s 20x1 earnings and thought that the pressure to show financial results would ease. However, Ellen North, TCC s president, told Kern that she saw no reason why the 20x2 bonuses should not be double those of 20x1. As a result, Kern felt pressure to increase reported income in order to exceed budgeted income by an even greater amount. This would assure increased bonuses. Kern met with Bill Keller of Pristeel, Inc., a primary vendor of TCC s manufacturing supplies and equipment. Kern and Keller have been close business contacts for many years. Kern asked Keller to identify all of TCC s purchases of perishable supplies as equipment on Pristeel s sales invoices. The reason Kern gave for his request was that TCC s president had imposed stringent budget constraints on operating expenses but not on capital expenditures. Kern planned to capitalize the purchase of perishable supplies, and include them with the Equipment account on the balance sheet. In this way Kern could defer the expense recognition for these items to a later year. This procedure would increase reported earnings, leading to increased bonuses. Keller agreed to do as Kern
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