Question
Chapter 17 Case 1 Bronco Manufacturing has a large portfolio of debt securities held as an investment. The fair value of the securities is
Chapter 17 Case 1 Bronco Manufacturing has a large portfolio of debt securities held as an investment. The fair value of the securities is greater than its original cost, even though some debt securities have decreased in value. The vice-president of finance and the controller are preparing to classify the securities portfolio for the first time in accordance with GAAP. The VP of finance wants to classify those securities that have increased in value during the year 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. The controller 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 mayt not be as profitable. Instructions: Answer the following question. a. Will classifying the portfolio as each proposes have the effect on earnings that each says it will? b. Is there anything unethical in what each of them proposes? c. Who are the stakeholders affected by their proposals? d. Assume that the VP and controller properly classify the portfolio into trading, available-for-sale, and held-to-maturity categories. Bet 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 ethical?
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