Fair Value of the Equity Investments
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Addison Manufacturing holds a large portfolio of debt and equity securities as an investment. The fair value of the portfolio is greater than its original cost, even though some securities have decreased in value. Ted Abernathy, the financial vice president, and Donna Nottebart, the controller, are near year-end in the process of classifying, for the first time, this securities portfolio in accordance with FASB Statement No. 115. Abernathy wants to classify those securities that have increased in value during the period as trading securities in order to increase net income this year. He wants to classify all the securities that have decreased in value as available-for-sale (equity securities) and as held-to-maturity (debt securities).
Nottebart disagrees. She wants to classify those securities that have decreased in value as trading securities and those that have increased in value as available-for-sale and held-to-maturity. She contends the company is reporting a good earnings year and that recognizing the losses helps to smooth income this year. As a result, the company will have built-in gains for future periods when the company may not be as profitable.
Discuss which treatment you would choose for determining the fair value of the equity investments. Use factual information to justify your treatment choice.
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Solution Summary
This solution assists in determining the fair value of the equity investments.
Solution Preview
First, FASB 115, Accounting for Certain Investments in Debt and Equity Securities, classify investments into held to maturity, trading securities and available ...
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