(Fair Value) Addison Manufacturing holds a large portfolio of debt securities as
ID: 2537505 • Letter: #
Question
(Fair Value) Addison Manufacturing holds a large portfolio of debt securities as an investment. The fair value of the portfolio is greater than its original cost, even though some debt securities have decreased in value. Sam Beresford, the financial vice president, and Angie Nielson, the controller, are near year-end in the process of classifying for the first time this securities portfolio in accordance with GAAP. Beresford wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as held-to-maturity Nielson disagrees. She wants to classify those debt securities that have decreased in value as trading securities and those that have increased in value as held-to-maturity. She contends that the company is having a good earnings year and that recognizing the losses will help to smooth the income this year. As a result, the company will have built-in gains for future periods when the company may not be as profitable. Instructions Answer the following questions. Will classifying the portfolio as each proposes actually have the effect on earnings that each says it will? Is there anything unethical in what each of them proposes? Who are the stakeholders affected by their proposals? Assume that Beresford and Nielson properly classify the entire portfolio into trading, available-for-sale, and held-to-maturity categories. But then each proposes to sell just before year-end the securities with gains or with losses, as the case may be, to accomplish their effect on earnings. Is this unethical?Explanation / Answer
a) Yes it will have impact on Earning Posivitevely or Negatively as discussed by both of them
b) Yes it against the accounting standard of recognising financial asset. Recgnising of Financial asset is based on the business model of the organisation. Further ideally the whole portfolio should be recoginsed as available for sale or Available for Maturity. The stakeholder affected will be the investor, banks and managment.
c) In case they propose to sell just before year end it will question their ability to follow the accounting standard on recognising the finacail asset. In case of investment held till maturity it assumed that it will be redeemed at the end of the Maturity. The classification also effect the current asset and Non current asset classification. So in case they sell the asset before the year end they will be answerable to Board and investor on their judgement of classification of investment in accordance with the accounting standard
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.