Fair value of debt and equity securities portfolio of Band Co. is higher than its cost, inspite of the decrease in value of some securities. At year end, the financial vice president and the controller of the company are about to classify this securities portfolio for the first time. The vice president, who wants to increase net income for the year, proposes to classify the securities that have increased in value as trading. He also proposes to classify the equity securities that have decreased in value as available-for-sale and debt securities that have decreased in value as held-to-maturity: The controller, on the other hand, proposes to classify the securities that have decreased in value as trading. He further propeses to classify the equity securities that have increased in value as available-for-sale and the debt securities that have increased in value as held-to-maturity. Based on the fact that the company has been profitable this year, he states that recognizing losses will smooth out earnings. Hence, the company will be better off in future, at times when profitability decreases. Required: a. Discuss how you assess both of these proposals. b. Discuss the ethical issues related with these proposals and their effect on stakeholders.
Fair value of debt and equity securities portfolio of Band Co. is higher than its cost, inspite of the decrease in value of some securities. At year end, the financial vice president and the controller of the company are about to classify this securities portfolio for the first time. The vice president, who wants to increase net income for the year, proposes to classify the securities that have increased in value as trading. He also proposes to classify the equity securities that have decreased in value as available-for-sale and debt securities that have decreased in value as held-to-maturity: The controller, on the other hand, proposes to classify the securities that have decreased in value as trading. He further propeses to classify the equity securities that have increased in value as available-for-sale and the debt securities that have increased in value as held-to-maturity. Based on the fact that the company has been profitable this year, he states that recognizing losses will smooth out earnings. Hence, the company will be better off in future, at times when profitability decreases. Required: a. Discuss how you assess both of these proposals. b. Discuss the ethical issues related with these proposals and their effect on stakeholders.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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Transcribed Image Text:Fair value of debt and equity securities portfolio of Band Co. is higher than its cost, inspite of the
decrease in value of some securities. At year end, the financial vice presidentand the controller of
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the company are about to classify this securities portfolio for the first time. The vice president, who
wants to increase net income for the year, proposes to classify the securities that have increased in
value as trading. He also proposes to classify the equity securities that have decreased in value as
available-for-sale and debt securities that have decreased in value as held-to-maturity. The
controller, on the other hand, proposes to classify the securities that have decreased in value as
trading . He further propeses to classify the equity securities that have increased in value as
available-for-sale and the debt securities that have increased in value as held-to-maturity, Based on
the fact that the company has been profitable this year, he states that recognizing losses will smooth
out earnings. Hence, the company will be better off in future, at times when profitability decreases.
Required:
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a. Discuss how you assess both of these proposals.
b. Discuss the ethical issues related with these proposals and their effect on stakeholders.
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