Accounting

Assignment 2

20 Points

Due 10/21/15

Buff Branding Company (BBC) is principally engaged in the manufacture and sale of collegiate merchandise and clothing. BBC was extremely successful in its early years when it partnered with colleges and universities to create merchandise and clothing for athletes, students, and alumni. This partnership enabled BBC to hire a group of talented college graduates with business degrees. Together, BBC and these graduates created a new investment department in 20X1. BBC management set aside a portion of the previous years’ profits for the investment department to invest in equity and debt securities for the Company. BBC has several investments in the department’s portfolio as of December 31, 20X1. BBC classified all equity and debt securities as either available for sale or held to maturity under the Company’s investment policy.

The accounting department is preparing financial statements for the fiscal year ended December 31, 20X1, and the auditors have asked BBC whether any of its investments are other-than-temporarily impaired. The CFO of BBC needs to present the investment department’s financial results at the next operating committee meeting so the committee can decide whether to continue the investment program and if so, determine the amount of funds that should be allocated. In looking at the accounting records provided by the accounting department, the CFO is beginning to question the investment department’s expertise because some of the investments have declined in value relative to the original purchase price.

The accounting manager compiled information about the following investments in order to determine whether the investment is other-than-temporarily impaired as of December 31, 20X1.

· BBC holds a debt security issued by Red Raider with an amortized cost of $2,000 and a fair value of $1,800 as of December 31, 20X1. The present value of the cash flows BBC expects to receive, taking into consideration the credit quality of Red Raider, discounted at the security’s original effective interest rate is $1,840 as of December 31, 20X1. BBC intends to sell this security.

· BBC purchased 1,000 shares of AllHeart stock on February 14, 20X1, at $40 a share to celebrate Valentine’s Day and classified its investment as available for sale. In March, the share price dropped to $25, and from April through November the price remained steady between $24.75 and $25.25 per share. On December 31, 20X1, the price was $25. BBC management does not believe the decline in price to be permanent and has asserted that it does not intend to sell this investment in the future.

· On February 2, 20X1, BBC bought 100 shares of SuperBowl Incorporated stock at $100 a share, classifying its investment as available for sale. In August, the price of the stock decreased to $70, and from September through November, the stock price fluctuated between $65 and $75. As of December 31, 20X1, the price of the stock was $72. On January 31, 20X2, the date the Company’s financial statements are issued, the price of the stock went up to $75.

Relevant professional standards for this assignment may include:

FASB ASC 320

Required:

In a short research paper (1 – 3 pages), discuss the following issues as they relate to BBC and provide the appropriate FASB ASC references. Create a clear and organized paper that accomplishes the goals of the assignment, employs appropriate tools (FASB ASC), and demonstrates your strategy for solving the problem and a defensible and appropriate solution to the problem using good composition skills, effective organization, and effective writing style.

1. For the Red Raider investment, determine if BBC should record an other-than- temporary impairment as of December 31, 20X1, and if so, for what amount. Does the answer change if BBC does not intend to sell the security and it is not more likely than not that it will be required to sell the security?

2. For the AllHeart stock investment, determine if BBC should record an other-than- temporary impairment as of December 31, 20X1, and if so, for what amount.

3. Assuming BBC has determined its investment in SuperBowl Incorporated stock is other-than-temporarily impaired, how much should be recorded as an impairment charge as of December 31, 20X1?

4. Assume the same facts as in 3 above, except that BBC has not yet determined whether an impairment exists or the amount of any possible impairment. For SuperBowl Incorporated, would BBC still conclude that the investment is other-than-temporarily impaired, and would the impairment charge as of December 31, 20X1, be different if the stock price at issuance of the financial statements (i.e., as of January 31, 20X2) was $95 and not $75?