Bartlet Financial Services Company holds a large portfolio ofdebt and stock securities as an investment. The total fair value ofthe portfolio at December 31, 2014, is greater than total cost.Some securities have increased in value and others have decreased.Deb Faust, the financial vice president, and Jan McCabe, thecontroller, are in the process of classifying for the first timethe securities in the portfolio. Faust suggests classifying thesecurities that have increased in value as trading securities inorder to increase net income for the year. She wants to classifythe securities that have decreased in value as long-termnon-trading securities, so that the decreases in value will notaffect 2014 net income. McCabe disagrees. She recommendsclassifying the securities that have decreased in value as tradingsecurities and those that have increased in value as long-termnon-trading securities. McCabe argues that the company is having agood earnings year and that recognizing the losses now will help tosmooth income for this year. Moreover, for future years, when thecompany may not be as profitable, the company will have built-ingains.
Instructions
(a) Will classifying the securities as Faust and McCabe suggestactually affect earnings as each says it will?
(b) Is there anything unethical in what Faust and McCabe propose?Who are the stakeholders affected by their proposals?
(c) Assume that Faust and McCabe properly classify the portfolio.At year-end, Faust proposes to sell the securities that willincrease 2014 net income, and McCabe proposes to sell thesecurities that will decrease 2014 net income. Is thisunethical?
Bartlet Financial Services Company holds a large portfolio ofdebt and stock securities as an investment. The total fair value ofthe portfolio at December 31, 2014, is greater than total cost.Some securities have increased in value and others have decreased.Deb Faust, the financial vice president, and Jan McCabe, thecontroller, are in the process of classifying for the first timethe securities in the portfolio. Faust suggests classifying thesecurities that have increased in value as trading securities inorder to increase net income for the year. She wants to classifythe securities that have decreased in value as long-termnon-trading securities, so that the decreases in value will notaffect 2014 net income. McCabe disagrees. She recommendsclassifying the securities that have decreased in value as tradingsecurities and those that have increased in value as long-termnon-trading securities. McCabe argues that the company is having agood earnings year and that recognizing the losses now will help tosmooth income for this year. Moreover, for future years, when thecompany may not be as profitable, the company will have built-ingains.
Instructions
(a) Will classifying the securities as Faust and McCabe suggestactually affect earnings as each says it will?
(b) Is there anything unethical in what Faust and McCabe propose?Who are the stakeholders affected by their proposals?
(c) Assume that Faust and McCabe properly classify the portfolio.At year-end, Faust proposes to sell the securities that willincrease 2014 net income, and McCabe proposes to sell thesecurities that will decrease 2014 net income. Is thisunethical?
