Problem:
Qtip Corp owns stock in Maxey Corp. The investment represents a 10% interest and Qtip is unable to exercise significant influence over Maxey.
The Maxey stock was purchased by Qtip on January 1, 2002 for $23,000. The stock consistently pays an annual dividend to Qtip of $2,000. Qtip classifies the stock as available for sale. Its fair value at December 31, 2009 was $21,600. The amount was properly reported as an asset in the balance sheet. Due to the development of a new Maxey product line, the market value of Qtip's investment rose to $27,000 at December 31, 2010.
The Qtip management team is aware of the provisions of SFAS No. 115. The possibility of changing the classification from available for sale to trading is discussed. This change is justified, the managers say, because they intend to sell the security at some point in 2011 so that they can realize the gain.
Q1. Discuss the role that managerial intention playing in the accounting treatment of equity securities that have a readily determinable fair value under SFAS no. 115.
Q2. What income statement effect if any would the change in classification have for Qtip?
Q3. Are there any ethical considerations that need to be considered?
Q4. Opponents of SFAS No. 115 contend that allowing a change in classification masks effects of unrealized losses and results in improper matching of market value changes with accounting periods. Describe how the accounting treatment and proposed change in classification would result in this sort of mismatching.