Kasey Hartman is the controller for Wholemart Company, which has numerous long- term investments in debt securities. Wholemart’s investments are mainly in 5-year bonds. Hartman is preparing its year- end financial statements. In accounting for long-term debt securities, she knows that each long-term investment must be designated as a held-to-maturity or an available-for-sale security. Interest rates rose sharply this past year causing the portfolio’s fair value to substantially decline. The company does not intend to hold the bonds for the entire 5 years. Hartman also earns a bonus each year, which is computed as a percent of net income.
1. Will Hartman’s bonus depend in any way on the classification of the debt securities? Explain.
2. What criteria must Hartman use to classify the securities as held-to-maturity or available-for-sale?
3. Is there likely any company oversight of Hartman’s classification of the securities? Explain.