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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’ 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’s 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

Accounting for debt investments

Peyton Investments completed the following investment transactions during 2018:

2018

Jan. 5 Purchased Vedder Company’s \(400,000 bond at face value. Peyton classified the investment as available-for-sale. The Vedder bond pays interest at the annual rate of 4% on June 30 and December 31 and matures on December 31, 2021. Management’s intent is to keep the bonds for several years.

Jun. 30 Received an interest payment from Vedder.

Dec. 31 Received an interest payment from Vedder.

31 Adjusted the investment to its current market value of \)396,000

Requirements

Prepare a comprehensive income statement for Peyton Investments for year ended December 31, 2018. Assume net income was $200,000.

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements

In what category would Chaucer’s report the investment on the December 31, 2018, balance sheet?

Accounting for debt investments

On January 1, 2018, the Chaucer’s Restaurant decides to invest in Lake Turner bonds. The bonds mature on December 31, 2023, and pay interest on June 30 and December31 at 4% annually. The market rate of interest was 4% on January 1, 2018, so the $90,000 maturity value bonds sold for face value. Chaucer’s intends to hold the bonds until December 31, 2023.

Requirements

1. Journalize the transactions related to Chaucer’s investment in Lake Turner bonds during 2018.

Question: P10-22B Classifying and accounting for debt and equity investments

Captain Transfer Corporation generated excess cash and invested in securities as follows:

2018

Jul. 2 Purchased 4,200 shares of Naradon, Inc. common stock at \(13.00 per share. Captain Transfer plans to sell the stock within three months, when the company will need the cash for normal operations. Captain Transfer does not have significant influence over Naradon.

Aug. 21 Received a cash dividend of \)0.40 per share on the Nardon stock investment.

Sep. 16 Sold the Naradon stock for \(13.70 per share.

Oct. 1 Purchased a Purple bond for \)40,000 at face value. Captain Transfer classifies the investment as trading and short-term.

Dec. 31 Received a \(600 interest payment from Purple.

31 Adjusted the Purple bond to its market value of \)44,000.

Requirements

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

Question: P10-20A Accounting for equity investments

The beginning balance sheet of Waterfall Source Co. included a \(400,000 investment in Evan stock (20% ownership, Waterfall has significant influence over Evan). During the year, Waterfall Source completed the following investment transactions:

Mar. 3 Purchased 4,000 shares at \)11 per share of Lili Software common stock as a long-term equity investment, representing 7% ownership, no significant influence.

May 15 Received a cash dividend of \(0.61 per share on the Lili investment.

Dec. 15 Received a cash dividend of \)70,000 from Evan investment.

31 Received Evan’s annual report showing \(300,000 of net income.

31 Received Lili’s annual report showing \)120,000 of net income for the year.

31 Evan’s stock fair value at year-end was \(390,000.

31 Lili’s common stock fair value at year-end was \)12 per share.

Requirements

3. Prepare Waterfall Source’s partial balance sheet at December 31, 2018, from your answers in Requirement 2.

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