Shenandoah Furniture Company is a small publicly traded company. The Company pay

Question

Shenandoah Furniture Company is a small publicly traded company. The Company pays annual bonuses based on a percentage of net income. Randolph Hundley, the controller of Shenandoah Furniture Company, has noticed that the Company holds equity securities in a variety of companies that were purchased as strategic investments.. A few of these securities are currently valued above cost, but most are valued below cost at the current time. Hundley suggests to his assistant, Todd that they should treat the securities with unrealized gains as trading securities and those with unrealized losses should be treated differently – with the unrealized losses being reported in other comprehensive income.

Recommendations for this ethical issue?

Explanation / Answer

Gain or loss from trading securities are included in net income. Since the bonus is paid as percentage of net income and by treating the securities with unrealised gain as trading securties will result in increased bonus to management which is unfair to other members and directors etc. hence its unethical.

It is recomended to give the same treatment to both the securities whether its with gain or with loss.

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