Scenario 1:

As you complete the audit of Blanket Insurance Company, an interesting item comes to your attention. One of the staff accountants on the job noted that at the end of each quarter, the company sold a portion of its investments classified as available-for-sale. With each sale, Blanket was able to recognize a gain and increase income so that it would be able just to meet analyst forecasts. As the audit manager, you began to look into this finding, and an interesting pattern emerged. For the last 5 years, if the company's income appeared to fall short of the analysts' expectations, Blanket would sell available-for-sale investments that had increased in value and recognize a gain that would allow Blanket to meet the analysts' forecasts. Because the company has a significant investment portfolio, you overlooked the strategic timing of these sales of appreciated securities in previous years. In discussions with Blanket's management, the CEO noted that this practice was part of the company's financial reporting strategy. Also, the CEO argued that the recognition of these gains and losses was entirely within GAAP.

Question: What is your reaction to the CEO's comments?

Scenario 2 - Realized & Unrealized Losses

An important part of the accounting for investments in marketable securities is the distinction between the various classifications of investments.

Questions below:

• When a company has excess cash, what types of securities may it invest in?
• Explain how the distinction between the various investment classifications is made.
• Discuss the distinction between realized and holding gains and losses on investments in debt and equity securities.
• Explain how a company discloses realized and holding gains and losses on investments in equity securities on its financial statements.