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From my understanding, Mary is correct. Our eText states that Available-for-Sale securities are reported under “comprehensive income” and trading securities are reported under “net income”. This is because Available-for-Sale securities are intended to be sold within the next year and are reported as current assets. Trading securities are intended to be sold within the next three months. Therefore, only the investments that have decreased are being reported to the net income, which will result in some amount of reported loss while net income will still be higher than forecasted.

 

Using Tommy’s method, classifying all investments as trading securities will only decrease the net income if there has been more unrealized loss than gain over the last year. His method will not “give the investments time to recover and not impact net income” because trading securities are meant to be sold in a short period of time and their unrealized gain/loss is reported directly to the net income.

 

Mary’s method is only ethical if the company plans to sell all investments deemed “trading securities” in the short term. Her method is also only ethical if all the investments deemed “Available-for-Sale” are not long-term assets and are available to be sold within the next year. Tommy’s method is only ethical if all the investments of Tidewell Corporation are liquidated in the short term.  

 

In the scenario that Tommy’s decision prevails, it would be expected of the Tidewell Corporation to sell all their investments in the short term. If the sale of all classified trading securities does not happen in the short term, then the classification decision is unethical. 

 

If anyone notices an error in my explanation, please feel free to correct me as I had some trouble wrapping my brain around this concept. Thanks for the feedback in advance.