Question
Do you agree or disagree with their classifications of the 10-year bonds from the given scenario? Elaborate. Support your responses to classmates with additional research
Do you agree or disagree with their classifications of the 10-year bonds from the given scenario? Elaborate. Support your responses to classmates with additional research and/or examples of your understanding of accounting for investments.
In your initial post, describe the criteria you would use to classify the 10-year bonds. Be sure to elaborate your response by explaining your reasoning. Also, assess whether or not the classification of these investments would affect your annual bonus in any way.
The corporation does not intend to hold the 10-year bonds to maturity therefore this investment would not be classified as "held-to- maturity" securities but would be considered "available-for-sale" securities. "Available-for-sale (AFS) securities are debt investments not classified as trading or held-to-maturity securities. If the intent is to sell AFS securities within the longer of one year or the operating cycle, they are classified as short-term investments. Otherwise, they are classified as long-term investments" (Shaw, 2020).
The classification of these investments would affect the annual bonus due to the fair market value decline. AFS securities are valued at fair value and if fair market value of the portfolio decreases, the fair market value of the AFS securities will decrease as well. "Fair Value Adjustment account is for the entire portfolio, not individual securities" (Shaw, 2020). The decrease would result in unrealized losses which would be "reported in the equity section of the balance sheet" (Shaw, 2020). The annual bonus would be affected due to the decrease in net income and the annual bonus being based on a percentage of net income.
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