Question

Discuss the issues raised in Case C13-7 from a financial reporting and ethical perspective. You are...

  • Discuss the issues raised in Case C13-7 from a financial reporting and ethical perspective.

You are an accountant for Davanzo Company. The president of the company calls you into her office and says, “I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better investment. We could sell the bonds of Company X, which are currently worth $1 million even though they have an amortized cost basis of $950,000. But I don’t want to sell them because I like the steady stream of cash flow we get related to interest. Or we could sell the bonds in that dog, Company Z. These bonds are also worth $1 million, but they cost us $1.2 million. I hate to admit we made such a big mistake, and if they can somehow avoid bankruptcy, we may actually recover our investment. And then there’s that loss. I don’t want to report that. Second, I am going to use the $1 million to buy about 20% of the shares of Company M, but I seem to remember that there is some accounting rule that might affect how much we buy. I was also wondering about buying some of Company M’s convertible preferred stock so we can convert that into a large ownership position in the future. Let me know what you think.” You are aware that Company M is a new company that is not yet listed on the stock market, has been making losses, and is expected to continue making losses for a few more years.

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Answer #1

In my opinion as we aware about that the company M is a new company and is going to make a loss for few more years as of now we should not invest in that company. If the track record of company is not good or profitable in that case even after listing there value goes down. As company is occurring loss definetely at lower price shares will be available in future.

Further if we talk about Bond in Z ltd. we can wait untill we invest that amount in other options. It may be possible that during that time period company avoids the bankruptcy and company would recover all the amount without incurring any loss.

So in my opinion as of now we have to wait and thenafter only can take some steps.

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