Question

Addison Manufacturing holds a large portfolio of debt securities as an investment. The fair value of the portfolio is greater than its original cost, even though some debt securities have decreased in value. Sam Beresford, the financial vice president, and Angie Nielson, the controller, are near year-end in the process of classifying for the first time this securities portfolio in accordance with GAAP. Beresford wants to classify those securities that have increased in value during the period as trading 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 those that have increased in value as held-to-maturity. She contends that the company is having a good earnings year and that recognizing the 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-maturity categories. But then each proposes to sell just before year-end the securities with gains or with losses, as the case may be, to accomplish their effect on earnings. Is this unethical?

Answer 1

Answer:

a.

The classification of security as per every proposal will win the income .generally speaking if all profits are  classified as trading agreements ,they should be added to the count of the earlier year's income that depends on the  income statement .in case of a security being classified a salee and production exchange until it is understood or realized ,the shortfall will tumble to an overal deficit or net loss that will counterbalance the misfortune or loss to be perceived in the  income statement.

b.

GAAP doesn't take into consideration such classification ,so the recommendations made by the two parties are conflicting with GAAP and that makes it erroneous .The key partners or stake holders will be the governing body of the organization , its workers , prospective investors and shareholders , if any .

c.

As I would see it ,selling securities would not make well as they have their own choice to sell speculation portfolios and GAAP doesn't restrain such sales . GAAP takes into consideration the  sale of securities ,when utilizing the cost effective inventory method ,and if both do this to save the interest of the organization ,the speculator or investors and different partners follow GAAP rules ,it may be acceptable . Anyway , on the off chance that they willfully do as such to fulfill their own interest and misuse of budget summaries or financial statements ,it will be esteemed or deemed to be a deceptive or unethical act .