Question
Case 10-1 Investment Classication Qtip Corp. owns stock in Maxey Corp. The investment represents a 10 percent interest, and Qtip is unable to exercise signicant
Case 10-1 Investment Classication Qtip Corp. owns stock in Maxey Corp. The investment represents a 10 percent interest, and Qtip is unable to exercise signicant inuence over Maxey. The Maxey stock was purchased by Qtip on January 1, 2013, for $23,000. The stock consistently pays an annual dividend to Qtip of $2,000. Qtip classies the stock as available for sale. Its fair value at December 31, 2013, was $21,600. This amount was properly reported as an asset in the balance sheet. Owing to the development of a new Maxey product line, the market value of Qtips investment rose to $27,000 at December 31, 2014. The Qtip management team is aware of the provisions of SFAS No. 115 . The possibility of changing the classication from available for sale to trading is dis-cussed. This change is justied, the managers say, because they intend to sell the security at some point in 2015 so they can realize the gain. Required: a. Discuss the role that managerial intention plays in the accounting treatment of equity securities that have a readily determinable fair value under SFAS No. 115 . b. What income statement effect, if any, would the change in classication have for Qtip? c. Discuss the ethical considerations of this case. d. Opponents of SFAS No. 115 contend that allowing a change in classication masks effects of unrealized losses and results in improper matching of market-value changes with accounting periods. Describe how the account-ing treatment and the proposed change in classication would result in this sort of mismatching.
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