Bestway International is an import-export company. Due to the nature of its business, the company often has
Question:
On December 31, 2011, Bestway's year end the company had the following short-term equity investments in marketable securities:
Both these investments were purchased with the intention of selling them as soon as they rose significantly in value or Bestway needed the cash, whichever occurred first.
Bestway's CEO has recently approached you, the corporate controller, with some exciting news. The company plans to sell a significant bond issue in 2012 to provide funding for a large expansion into Eastern European markets. The CEO wants the statement of earnings for 2012 to be as strong as possible, and therefore tells you to record all the investments at their cost in the balance sheet on December 31, 2011, so that the increase in value will be reflected as a large gain when they are sold in 2012.
The CEO says he knows that assets are usually recorded at their cost, and that accountants tend to be conservative. Accordingly, he does not see any problem with showing the investments at their cost at the end of 2011, and waiting until they are sold in 2012 to report any gain on them.
Required:
Is the CEO correct? Refer to accounting principles in preparing your response to the CEO's position. Your response should include an outline of the proper accounting treat¬ment for short-term investments such as these, and a brief explanation of the reasoning behind it.
Balance sheet is a statement of the financial position of a business that list all the assets, liabilities, and owner’s equity and shareholder’s equity at a particular point of time. A balance sheet is also called as a “statement of financial...
Step by Step Answer:
Financial Accounting A User Perspective
ISBN: 978-0470676608
6th Canadian Edition
Authors: Robert E Hoskin, Maureen R Fizzell, Donald C Cherry