Kasey Hartman is the controller for Wholemart Company, which has numerous long-t
ID: 2480951 • Letter: K
Question
Kasey Hartman is the controller for Wholemart Company, which has numerous long-term investments in debt securities. Wholemart's investments are mainly in five-year bonds. Hartman is preparing its year-end financial statements. In accounting for long-term debt securities, she knows that each long-term investment must be designated as a held-to-maturity or an available-for-sale security. Interest rates rose sharply this past year, causing the portfolio's fair value to substantially decline. The company does not intend to hold the bonds for the entire five years. Hartman also earns a bonus each year, which is computed as a percent of net income. Be sure to include the following in your original response which should be at least three paragraphs with at least three sentences each:
1.Will Hartman's bonus depend in any way on the classification of the debt securities?
2.What criteria must Hartman use to classify the securities as held-to-maturity or available-for-sale?
3.Is there likely any company oversight of Hartman's classification of the securities? Explain.
Explanation / Answer
1. No bonus will be given based on the percentage of net income. Hence it variably dont depend on the classification of the debt. The classification is required for the accounting of the income earned and for the valuation of the debt.
2. Foe classification we have to see the intention of holding the asset in the following way:
A held to maturity security is a debt or equity security that is purchased with the intention of holding the investment to maturity. This type of security is reported at amortized cost on a company's financial statements and is usually in the form of a debt security with a specific maturity date.An available-for-sale security is a debt or equity security that is purchased with the intent of selling before it reaches maturity, or selling prior to a lengthy time period in the event the security does not have a maturity.
3. Based on classification of the assets, the income recongnition will change.
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.