Question

Union Planters is a bank holding company (that is, a corporation that owns banks). Union Planters manages $32 billion in assets, the largest of which is its loan portfolio of $19 billion. In addition to its loan portfolio, however, like other banks it has significant debt investments. The nature of these investments varies from short-term in nature to long-term in nature. As a consequence, consistent with the requirements of accounting rules, Union Planters reports both the fair value and amortized cost of its investments. The following facts were found in a recent Union Planters’ annual report.


Instructions
(a) Why do you suppose Union Planters purchases investments, rather than simply making loans? Why does it purchase investments that vary in nature both in terms of their maturities and in type (debt versus equity)?
(b) How must Union Planters account for its investments at fair value and amortized cost?
(c) In what ways does classifying investments into two different categories assist investors in evaluating the profitability of a company like Union Planters?
(d) Suppose that the management of Union Planters was not happy with its net income for the year.
What step could it have taken with its investment portfolio that would have definitely increased reported profit? How much could it have increased reported profit? Why do you suppose it chose not to dothis?


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  • CreatedJune 17, 2013
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