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(Fair Value)

Addison Manufacturing holds a large portfolio of debt and equitysecurities as an investment. The fair value of the portfolio isgreater than its original cost, even though some securities havedecreased in value. Sam Beresford, the financial vice president,and Angie Nielson, the controller, are near year-end in the processof classifying for the first time this securities portfolio inaccordance with GAAP. Beresford wants to classify those securitiesthat have increased in value during the period as tradingsecurities in order to increase net income this year. He wants toclassify all the securities that have decreased in value asavailable-for-sale (the equity securities) and as held-to-maturity(the debt securities).

Nielson disagrees. She wants to classify those securities thathave decreased in value as trading securities and those that haveincreased in value as available-for-sale (equity) andheld-to-maturity (debt). She contends that the company is having agood earnings year and that recognizing the losses will help tosmooth the income this year. As a result, the company will havebuilt-in gains for future periods when the company may not be asprofitable.

Instructions

Answer the following questions.

(a)	Will classifying the portfolio as each proposes actually havethe effect on earnings that each says it will?

(b)	Is there anything unethical in what each of them proposes? Whoare the stakeholders affected by their proposals?

(c)

Assume that Beresford and Nielson properly classify the entireportfolio into trading, available-for-sale, and held-to-maturitycategories. But then each proposes to sell just before year-end thesecurities with gains or with losses, as the case may be, toaccomplish their effect on earnings. Is this unethical?