Question

FASB Codification Case #3

Classification of Bond Investment

Facts

On December 1, YR01 Target Inc. purchased, as an investment, bonds issued by General Steel

Co. These bonds have a face amount of $1,000,000 and were purchased at 106. The management

of Target Inc. has the positive intent and financial ability to hold these bonds until they mature

on July 1, YR05. The bond indenture agreement includes a provision which permits General

Steel Co. to call the bonds any time after August 1, YR02. If the bonds are called General Steel

Co. is required to pay the full face amount of the bonds plus any accrued interest.

Question

Given Target’s positive intent and financial ability to hold these bonds until they mature, how

should this bond investment be classified on the Target Inc. balance sheet at December 31,

YR01?

Required

1. Provide a brief written description of the proper classification of the bond investment on

Target’s balance sheet.

2. Identify the specific paragraph of the FASB Codification which addresses this issue and

submit a printout of this paragraph with your solution.

Grade Value

This case counts as a bonus question (maximum 2 percentage points) for examination #2.

You must work independently on this case (this is not a group project).

Due Date

Start of our next class meeting.

Answer 1

1.

As per accounting standards the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Those investments are to be classified in three categories and accounted for as follows:

Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost.

Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings.

Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity.

Solution as per given case and above facts Target Inc should classify the bonds as current assets as the bonds can be realised with in 12 months from the date of balance sheet.

The main intention of Target is to hold till maturity but general steel can call off bonds at any time.

So if it is likely that general steel would call of bonds with in 12months then it should be classifed as held for maturity under current assets other wise as held to maturity under investments