Kreiter Financial Services Limited, public company, purchased a large portfolio of debt and equity investments during 2015.

Question:

Kreiter Financial Services Limited, public company, purchased a large of debt and equity investments during 2015. The portfolio's total fair value at December 31, 2015, is greater than its total cost. Some securities have increased in value and others have decreased. Vicki Lemke, the financial vice-president, and Ula Greenwood, the controller, are busy classifying the securities in the for the first time.
Lemke suggests classifying the securities as follows:
1. Securities that have increased in value as trading investments.
2. Equity securities that have decreased in value as strategic investments and record the fair value adjustments on these securities in other comprehensive income.
3. Debt securities that have decreased in value as debt investments purchased to earn interest.
Greenwood disagrees. She says that they should follow the recommendations on how investments should be classified.
Instructions
(a) What will be the effect on profit if the investments are reported as Lemke suggests? Be specific.
(b) Is there anything unethical in what Lemke proposes?
(c) Who are the affected by their proposals?
(d) Which qualitative characteristics of financial reporting are not met if the investments are classified based on performance?
(e) How should the investments be classified?
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