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1) Pit Bull Enterprises has numerous investments in debt and equity securities. The comptroller Christina Wecker is preparing its year-end financial statements and is in the process of classifying for the first time the securities in the portfolio.
The poor economy in the past year has caused the portfolio’s overall fair value to substantially decline; however, some securities have increased in value and others have decreased. Wecker earns a bonus each year, which is computed as a percent of net income.
Wecker presents a schedule classifying the securities for the COO’s review. In reviewing the schedule the COO notices that the securities that have increased in value have been classified as trading securities while the securities that have decreased in value are classified as long-term available-for-sale securities.
a) Who are the stakeholders in this situation?b) Will Wecker’s bonus depend in any way on the classification of the securities? Explain.c) In your opinion, is Wecker being ethical in her method used to classify the securities? Explain.
2) Company owner Abel Terrio has reviewed the 2011 financial statements you prepared for Jackson Company as the accountant, and questions the $6,000 loss reported on the sale of its investment in Blackhawk Co. common stock.
Jackson acquired 50,000 shares of Blackhawk’s common stock on December 31, 2009, at a cost of $500,000. This stock purchase represented a 40% interest in Blackhawk. The 2010 income statement reported that earnings from all investments were $126,000.
On January 3, 2011, Jackson Company sold the Blackhawk stock for $575,000. Blackhawk did not pay any dividends during 2010 but reported a net income of $202,500 for that year. Terrio believes that because the Blackhawk stock purchase price was $500,000 and was sold for $575,000, the 2011 income statement should report a $75,000 gain on the sale.
Draft a one-half page memorandum (at least 2 paragraphs) to Terrio explaining why the $6,000 loss on sale of Blackhawk stock is correctly reported.