Reference no: EM132867

Question :

Qtip corp. owns stock in Maxey corp. The investment shows a 10 percent interest, and Qtip is unable to exercise important influence over Maxey. 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 just value at December 31, 2009, was $21,600. This amount was properly reported as an asset in the balance sheet. Because of the development of a new Maxey product line, the market value of Qtips investment rose to $27,000 at December 31, 2010. The Qtip management team is conscious of the provisions of SFAS No. 115. The option of changing the classification from available for sale to trading is discussed. This change is justified, the managers say, due to they intend to sell the security at some point in 2011 so that they will realize the gain.

a. Show 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 outcome, if any, would the change in categorization have for Qtip?

c. Show the ethical considerations of this case

d. Opponents of SFAS No. 115 contend that allowing a change in categorization masks effects of unrealized losses and results in improper matching of market-value changes with accounting periods. Explain how the accounting treatment and the proposed change in classifications could result in this sort of mismatching.