Wecker is the controller for Wildcat Company, which has numerous long-term inves

Question

Wecker is the controller for Wildcat Company, which has numerous long-term investments in debt securities. Wildcat?s investments are mainly in 10-year bonds. Wecker 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 market value to substantially decline. The company does not intend to hold the bonds for the entire 10 years. Wecker also earns a bonus each year which is computed as a percent of net income. Questions: 2 pts 1. Will Wecker?s bonus depend in any way on the classification of the debt securities? Explain? 3 pts 2. What criteria must Wecker use to classify the securities as held-to-maturity or available-for-sale.?

Explanation / Answer

1. It is given that Wecker earns bonus which is computed as percentage of net income, and net income is affected by the classification of debt securities. For example 'available for sale security' is valued at fair value (mark to market) while 'held to maturity' is valued at amortised value, if Wildcat intends to not to hold portfolio till maturity it will have recalssify the portfolio as available for sale security and charge the decline to net income. hence income will decline inturn his bonus.

2. Cassification criteria :

A. Available for sale security': AFS are valued at fair value (mark to market). Fair value is the market price of the security or what willing buyers and sellers would pay and accept to excahnge the security.

B.Held to maturity: HTM securities are valued at amortised value.

   

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