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Chapter 13: Q6CA (page 658)

ETHICS (Fair Value) Addison Manufacturing holds a large portfolio of debt securities as an investment. The fair valueof the portfolio is greater than its original cost, even though some debt securities have decreased in value. Sam Beresford, the financialvice president, and Angie Nielson, the controller, are near year-end in the process of classifying for the first time this securitiesportfolio in accordance with GAAP. Beresford wants to classify those securities that have increased in value during the period astrading 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 thosethat have increased in value as held-to-maturity. She contends that the company is having a good earnings year and that recognizingthe 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.

(a) Will classifying the portfolio as each proposes actually have the effect on earnings that each says it will?

(b) Is there anything unethical in what each of them proposes? Who are the stakeholders affected by their proposals?

(c) Assume that Beresford and Nielson properly classify the entire portfolio into trading, available-for-sale, and held-to maturitycategories. But then each proposes to sell just before year-end the securities with gains or with losses, as thecase may be, to accomplish their effect on earnings. Is this unethical?

Short Answer

Expert verified

The proposal of selling securities at year-end is unethical.

Step by step solution

01

Step 1:Effect on the earnings

Yes, each proposal will affect the earnings of the company. Beresford鈥檚 proposal increases the current year鈥檚 profits of the company. On the other hand, Nielson鈥檚 proposal decreases the current year鈥檚 profits.

02

 Effect of the proposals

No, there is nothing unethical in both proposals because both want to benefit the company by their submission. Stakeholders affected by their proposals are owners of the company.

03

Unethical or ethical

Yes, there is unethical in this because due to their proposal of selling securities at year-end, the company will face heavy losses as some deposits are more minor than cost.

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Most popular questions from this chapter

Under what conditions should a short-term obligation be excluded from current liabilities?

(Debt and Equity Investments) Cardinal Paz Corp. carries an account in its general ledger called Investments,which contained debits for investment purchases, and no credits, with the following descriptions.

Feb. 1, 2017 Sharapova Company common stock, \(100 par, 200 shares \) 37,400

April 1 U.S. government bonds, 11%, due April 1, 2027, interest payable

April 1 and October 1, 110 bonds of \(1,000 par each 110,000

July 1 McGrath Company 12% bonds, par \)50,000, dated March 1, 2017,

purchased at 104 plus accrued interest, interest payable

annually on March 1, due March 1, 2037, 54,000

(Round all computations to the nearest dollar.)

(a) Prepare entries necessary to classify the amounts into proper accounts, assuming that the debt securities are classified

as available-for-sale.

(b) Prepare the entry to record the accrued interest and the amortization of premium on December 31, 2017, using the

straight-line method.

(c) The fair values of the investments on December 31, 2017, were:

Sharapova Company common stock \( 31,800

U.S. government bonds 124,700

McGrath Company bonds 58,600

What entry or entries, if any, would you recommend be made?

(d) The U.S. government bonds were sold on July 1, 2018, for \)119,200 plus accrued interest. Give the proper entry.

How should a debt callable by the creditor be reported in the debtor鈥檚 financial statements?

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson鈥檚 common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle鈥檚 common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik鈥檚 income statement and balance sheet?

Pacific Airlines Co. awards members of its Frequent Fliers Club one free round-trip ticket, anywhere on its flight system, for every 50,000 miles flown on its planes. How would you account for the free ticket award?
See all solutions

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