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Chapter 10: Q1EI_2 (page 576)

As a result of the recent mortgage crisis, many banks reported record losses to their mortgage receivables and other assets based on the decline in these assets鈥� fair values.

Requirements

If a business chooses not to report these losses, is there an ethical issue involved? Who is hurt?

Short Answer

Expert verified

Answer

Yes, non-reporting of losses in the same year will lead to ethical issues, and bank stakeholders will get hurt.

Step by step solution

01

Step-By-Step Solution

Step 1: Definition of Misrepresentation

Misrepresentation can be defined as the unfair practice of representing false information on the financial statement of the business entity.

02

Ethical Issues Involved

Non-reporting of the losses in the same year will be included in the unfair practices because it will overstate the bank鈥檚 assets and income. Due to overstatement of the assets and income, financial statements will be misrepresented.

Due to such misrepresentation, stakeholders will get hurt because they will arrive at the wrong investment decision.

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Most popular questions from this chapter

Classifying and accounting for debt and equity investments

Jetway Corporation generated excess cash and invested in securities as follows: 2018

Jul. 2 Purchased 4,200 shares of Pogo, Inc. common stock at \(12.00 per share. Jetway plans to sell the stock within three months, when the company will need the cash for normal operations. Jetway does not have significant influence over Pogo.

Aug. 21 Received a cash dividend of \)0.80 per share on the Pogo stock investment.

Sep. 16 Sold the Pogo stock for \(13.40 per share.

Oct. 1 Purchased a Violet bond for \)20,000 at face value. Jetway classifies the investment as trading and short-term.

Dec. 31 Received a \(100 interest payment from Violet.

31 Adjusted the Violet bond to its market value of \)22,000.

Requirements

Where is the unrealized holding gain or loss associated with the trading debt investment reported?

Match the key term to the scenario.

1. Available-for-sale debt investments.

a. Jane owns 53% of Richard鈥檚 Roses鈥檚 voting stock.

2. Controlling interest equity investments.

b. Joe owns debt security in Bones, Inc. and intends to hold it until maturity.

3. Trading debt investments.

c. Jeannie owns a debt security in Cricket, Inc. and plans on selling the debt after one year.

4. Held-to-maturity debt investments.

d. Jimenez owns 5% of Delgado, Inc.鈥檚 voting stock but does not have the ability to participate in the decisions of Delgado, Inc.

5. Significant influence on equity investments.

e. Jacob owns 24% of Pay, Inc.鈥檚 voting stock and has the ability to exert influence over Pay, Inc.

6. No significant influence on equity investments.

f. Jim owns a debt security in Tag, Inc.鈥檚 and plans on holding the debt for only a week.

Accounting for debt investments

Advance & Co. owns vast amounts of corporate bonds. Suppose Advance buys $1,100,000 of FermaCo bonds at face value on January 2, 2018. The FermaCo bonds pay interest at the annual rate of 3% on June 30 and December 31 and mature on December 31, 2037. Advance intends to hold the investment until maturity.

Requirements

How much cash interest will Advance receive each year from FermaCo?

Question: S10-6 Accounting for debt investments

On June 1, 2018, Josh鈥檚 Restaurant decides to invest excess cash of \(54,400 from the tourist season by purchasing a Jackrabbit, Inc. bond at face value. At year-end, December 31, 2018, Jackrabbit鈥檚 bond had a market value of \)51,200. The investment is categorized as an available-for-sale debt investment and will be held for the short-term.

Requirements

In what category and at what value would Josh report the asset on the December 31, 2018, balance sheet? In what account would the market price change in Jackrabbit鈥檚 stock be reported, if at all?

Question: S10-5 Accounting for debt investments

On February 1, 2018, Bell Co. decides to invest excess cash of \(16,800 by purchasing a Grant, Inc. bond at face value. At year-end, December 31, 2018, the fair value of the Grant bond was \)19,600. The investment is categorized as a trading debt investment.

Requirements

What was the net effect of the investment on Bell鈥檚 net income for the year ended December 31, 2018?
See all solutions

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