Jack Phelps is the controller for Jayhawk Corporation. Jayhawk has numerous non-strategic investments. About 18 months ago, the company had significant amounts of idle cash that were invested in 16%, 10-year Delta Inc. bonds. Management’s intent was to hold the bonds until maturity. Jack is preparing the year-end financial statements. In accounting for investments, he knows he must review the fair values of the investments. Since the bonds were purchased, Delta Inc.’s success has declined significantly and it may go into receivership. Jack earns a bonus each year that is calculated as a percentage of the net income of the corporation.
1. Will Jack’s bonus be affected in any way by an impairment assessment of the debt securities?
2. What criteria should Jack consider when reviewing the fair value of investments?
3. Are there any likely checks in the corporation to review how Jack has treated the securities for year-end?