Union Planters Union Planters is a Tennessee bank holding company (that is, a corporation that owns banks). (Union Planters is now part of Regions Bank.) Union Planters manages $32 billion in assets, the largest of which is its loan portfolio of $19 billion. In addition to its loan portfolio, however, like other banks it has signifi- cant debt investments. The nature of these investments varies from short-term in nature to long-term in nature. As a consequence, consistent with the requirements of accounting rules, Union Planters reports itsinvestments in two different categoriestrading and available-for-sale. The following facts were found in a recent Union Planters annual report. Instructions (a)Why do you suppose Union Planters purchases investments, rather than simply making loans? Why does it purchase investments that vary in nature both in terms of their maturities and in type (debt versus stock)? (b)How must Union Planters account for its investments in each of the two categories? (c)In what ways does classifying investments into two different categories assist investors in evaluating the profitability of a company like Union Planters? (d)Suppose that the management of Union Planters was not happy with its net income for the year. What step could it have taken with its investment portfolio that would have definitely increased reported profit? How much could it have increased reported profit? Why do you suppose it chose not to do this? Accounting, Analysis, and Principles Instar Company has several investments in the securities of other companies. The following information regarding these investments is available at December 31, 2014. 1. Instar holds bonds issued by Dorsel Corp. The bonds have an amortized cost of $320,000 and their fair value at December 31, 2014, is $400,000. Instar intends to hold the bonds until they mature on December 31, 2022. 2. Instar has invested idle cash in the equity securities of several publicly traded companies. Instar in- tends to sell these securities during the first quarter of 2015, when it will need the cash to acquire seasonal inventory. These equity securities have a cost basis of $800,000 and a fair value of $920,000 at December 31, 2014. 3. Instar has a significant ownership stake in one of the companies that supplies Instar with various components Instar uses in its products. Instar owns 6% of the common stock of the supplier, does not have any representation on the suppliers board of directors, does not exchange any personnel with the supplier, and does not consult with the supplier on any of the suppliers operating, financial, or strategic decisions. The cost basis of the investment in the supplier is $1,200,000 and the fair value of the investment at December 31, 2014, is $1,550,000. Instar does not intend to sell the investment in the foreseeable future. The supplier reported net income of $80,000 for 2014 and paid no dividends. 4.Instar owns some common stock of Forter Corp. The cost basis of the investment in Forter is $200,000 and the fair value at December 31, 2014, is $50,000. Instar believes the decline in the value of its invest- ment in Forter is other than temporary, but Instar does not intend to sell its investment in Forter in the foreseeable future. 5.Instar purchased 25% of the stock of Slobbaer Co. for $900,000. Instar has significant influence over the operating activities of Slobbaer Co. During 2014, Slobbaer Co. reported net income of $300,000 and paid a dividend of $100,000. Accounting (a)Determine whether each of the investments described above should be classified as available-for-sale, held-to-maturity, trading, or equity method. (b)Prepare any December 31, 2014, journal entries needed for Instar relating to Instars various invest- ments in other companies. Assume 2014 is Instars first year of operations. Analysis What is the effect on Instars 2014 net income (as reported on Instars income statement) of Instars invest- ments in other companies? (all dollars in millions) Trading account assets Securities available for sale Net income Net securities gains (losses) Gross AmortizedUnrealized CostGains $ 275 8,209$108 Gross Unrealized Losses $15 Fair Value $275

HERE IS THE QUESTION

(d)Suppose that the management of Union Planters was not happy with its net income for the year. What step could it have taken with its investment portfolio that would have definitely increased reported profit? How much could it have increased reported profit? Why do you suppose it chose not to do this?