Bartlet Financial Services Company holds a large portfolio of debt an APU

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4-5 Page essay with 3 references

Bartlet Financial Services Company holds a large portfolio of debt and stock securities as an
investment. The total fair value of the portfolio at December 31, 2014, is greater than total cost.
Some securities have increased in value and others have decreased. Deb Faust, the financial
vice president, and Jan McCabe, the controller, are in the process of classifying for the first time
the securities in the portfolio. Faust suggests classifying the securities that have increased in
value as trading securities in order to increase net income for the year. She wants to classify the
securities that have decreased in value as long-term non-trading securities, so that the
decreases in value will not affect 2014 net income. McCabe disagrees. She recommends
classifying the securities that have decreased in value as trading securities and those that have
increased in value as long-term non-trading securities. McCabe argues that the company is
having a good earnings year and that recognizing the losses now will help to smooth income for
this year. Moreover, for future years, when the company may not be as profitable, the company
will have built-in gains.

Instructions
(a) Will classifying the securities as Faust and McCabe suggest actually affect earnings as each
says it will?
(b) Is there anything unethical in what Faust and McCabe propose? Who are the stakeholders
affected by their proposals?