Reference no: EM13142287
The Maxey stock was purchased by Qtip on January 1, 2002, for $23,000.
The stock consistently pays an annual dividend to Qtip of $2,000. Qtip classifies the stock as available for sale. Its fair value at December 31, 2009, was $21,600. This amount was properly reported as an asset in the balance sheet. Due to the development of a new Maxey product line, the market value of Qtip’s investment rose to $27,000 at December 31, 2010.
The Qtip management team is aware of the provisions of SFAS No. 115. The possibility of changing the classifi cation from available for sale to trading is discussed. This change is justifi ed, the managers say, because they intend to sell the security at some point in 2011 so that they can realize the gain.
Required:
a. Discuss the role that managerial intention plays in the accounting treatment of equity securities that have a readily determinable fair value under SFAS No. 115.
b. What income statement effect, if any, would the change in classification have for Qtip?
c. Discuss the ethical considerations of this case.
d. Opponents of SFAS No. 115 contend that allowing a change in classification masks effects of unrealized losses and results in improper matching of market value changes with accounting periods. Describe how the accounting treatment and the proposed change in classifi cation would result in this sort of mismatching.
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: What income statement effect, if any, would the change in classification have for Qtip? Discuss the ethical considerations of this case.
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