Question

Exercise 17-1 Classify the following investments. Each case is independent of the other. Investm (a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold, (b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock (c) Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year. (d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold. (e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time. (1) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now LINK TO TEXT LINK TO TEXT

Answer 1

Answer to EX 17-1 (First question in the list): a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold. Classification: TRADING Reason: A securiy investment shall be considered as TRADING if it is purchased and held by firm with the intention to trade (or sell) it as soon as such investment's market price increases so that firm can earn short-term gain from the sale transaction. Given scenario exactly describes the meaning of a TRADING security investment. b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock. Classification: AVAILABLE-FOR-SALE Reason: A securiy investment shall be considered as AVAILABLE-FOR-SALE if it is purchased and held by firm with the intention to hold for a longer period if the security does not have maturity date or till maturity when the security has maturity date. As it is given that the company is planning on eventually getting a total of 30% of its outstanding stock, this scenario exactly describes the meaning of a AVAILABLE-FOR-SALE security investment.

c) 10-year bonds were purchased in December of this year. The bonds are expected to be sold in January of next year. Classification: TRADING Reason: A securiy investment shall be considered as TRADING if it is purchased and held by firm with the intention to trade (or sell) it as soon as such investment's market price increases so that firm can earn short-term gain from the sale transaction. Given scenario exactly describes the meaning of a TRADING security investment. d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold. Classification: AVAILABLE-FOR-SALE Reason: A securiy investment shall be considered as AVAILABLE-FOR-SALE if it is purchased and held by firm with the intention to hold for a longer period if the security does not have maturity date or till maturity when the security has maturity date. As it is given that company would like to hold them until they mature, but money has been tight recently and they may need to be sold, this scenario exactly describes the meaning of a AVAILABLE-FOR-SALE security investment.

e) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time. Classification: HELD-TO-MATURITY Reason: A securiy investment shall be considered as HELD-TO-MATURITY if it is purchased and held by firm with the intention to hold for longer time period without maturity period. As it is given that company is planning to hold the preferred stock for a long time, this scenario exactly describes the meaning of a HELD-TO-MATURITY security investment. f) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now. Classification: AVAILABLE-FOR-SALE Reason: A securiy investment shall be considered as AVAILABLE-FOR-SALE if it is purchased and held by firm with the intention to hold for a longer period if the security does not have maturity date or till maturity when the security has maturity date. As it is given that company is investing money set aside for an expansion project planned 10 years from now, this scenario exactly describes the meaning of a AVAILABLE-FOR-SALE security investment.