Why Doesn’t the Gain Go on the Income Statement?

You are the controller for Chong Lai Company. You just received a very strongly worded e-mail message from the president of the company. The president has learned that a

$627,000 gain on a stock investment made by the company last year will not be reported in the income statement because you have classified the security as available-for-sale. With the gain, the company would report a record profit for the year. Without the gain, profits are actually down slightly from the year before. The president wants an explanation—now.

It has been your policy for the past several years to routinely classify all investments as available-for-sale. Your company is not in the business of actively buying and selling stocks and bonds. Instead, all investments are made to strengthen relationships with either suppliers or major customers. As such, your practice is to buy securities and hold them for several years.

Write a one-page memo to the president explaining the rationale behind your policy of security classification.