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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’s proposal increases the current year’s profits of the company. On the other hand, Nielson’s proposal decreases the current year’s 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

Question: With respect to the IASB conceptual framework project:

(a) Work is being conducted to produce separate discussion papers.

(b) Work is being conducted with the FASB.

(c) Work is being conducted to result in a discussion paper covering all the identified areas.

(d) The framework will not address elements of financial statements.

BE13-1 (L01) Roley Corporation uses a periodic inventory system and the gross method of accounting for purchase discounts. On July 1, Roley purchased \(60,000 of inventory, terms 2/10, n/30, FOB shipping point. Roley paid freight costs of \)1,200. On July 3, Roley returned damaged goods and received credit of $6,000. On July 10, Roley paid for the goods. Prepare all necessary journal entries for Roley.

(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.

Southeast Airlines Inc. awards members of its Flightline program a second ticket at half price, valid for 2 years anywhere on its flight system, when a full-price ticket is purchased. How would you account for the full-fare and half-fare tickets?

Briefly describe some of the similarities and differences between GAAP and IFRS with respect to the accounting for

investments.
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