Analyze the implications of McMurphy’s practice of smoothing income

E-Z Loan Company makes loans to high-risk borrowers. E-Z borrows from its banks and then lends money to people with bad credit. The bank requires E-Z Loan to submit quarterly financial statements in order to keep its line of credit. E-Z’s main asset is Notes Receivable. Therefore, Uncollectible Note Expense and Allowance for Uncollectible Notes are important accounts. Slade McQueen, the owner of E-Z Loan Company, wants net income to increase in a smooth pattern, rather than increase in some periods and decrease in others. To report smoothly increasing net income, McQueen overestimates the expense. He reasons that over time the income overstatements roughly offset the income understatements. Analyze the implications of McMurphy’s practice of smoothing income.

o Determine whether you think this practice is ethical. Defend your position.

o Evaluate other methods that could help smooth the income pattern.

o Determine the best method that is ethical. Justify your choice