Question

SYSCO and Fernando Foods (SFF) has hired you as an accounting/finance intern for the summer. The company is a top competitor in the industry and have perform extremely well over the past several years.    Consequently, SFF has built a rather large investment portfolio of debt and equity securities. You have been asked to review the drafted balance sheet on t December 31, 2018. You discovered that the cost of the total portfolio is greater than its fair value.    Individually, however, some securities have increase in value while others have decreased.    

Harold Love, CFO of SFF indicates that those securities have increased in value should be classified as trading securities.   Alternative, he wants to classify the securities that have decreased in value as long-term available-for-sale securities.

Your immediate supervisor, Phyllis Baker, says that classifying all the securities as long-term available-for-sale securities is the correct approach.   Baker’s argument is that any kind of gain or loss on investments s to uncertain and that income should NOT be affected by something the company cannot control

You are asked to express your opinion/recommendation as to how the portfolio should be reported on the balance sheet.     Both Love and Baker agree that since you are up-to-date on the latest accounting rules, you are the best person to resolve their conflict.

Write a letter addressed to both individuals, Harold Love and Phyllis Baker.   Your letter should recommend the proper approach for reporting the portfolio on the balance sheet.

From an ethical standpoint, you should also express what is good and what is not good about the argument of both parties.

From an accounting standpoint, you should express what I good and what is not good about the argument of both parties.

Answer 1

To Harold Love and Phyllis Baker,

The recommendations should be provided under following two standpoint towards the classification and presentation of securities under different heads in balance sheet :

Accounting Standpoint: According to accounting point of view, the securities should be classified as per the original determination at the time of investing in the securities. If while investing, it directors decided to keep the securities under trading securities, then they should be presented as “Trading Securities” in Balance Sheet, otherwise vice-versa.

Ethical Standpoint : According to ethical point of view, as the losing securities could lose more weight, so it is always better to get rid of such loss making securities and then they should be treated as “Trading securities” and should be disposed-off at an early good chance. The profit making securities should allowed to continue their gains and would be classified as “Long-term available-for-sale securities” under the Balance Sheet.

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