Chapter 15 Discussion Kasey Hartman is the controller for Wholemart Company, which has numerous long-term investments in debt securities

After doing extra research, I feel like the long-term debt securities are an asset. The problem is related to how much value the long- term debt asset is given. If the asset is devalued, the loss of value would be written off as an expense. This would lower net income. Because her bonus is tied to net income, she would benefit if the asset value is higher and not devalued. To avoid this she would be tempted to define the asset as held to maturity. The present value of the bond could be determined using the lower coupon rate of the bond rather than the current interest rate. If she classifies the bond as available for sale, she would have to use a lower value, because the higher current interest rate has lowered the value of the bond. One criterion she could use is that the coupon rate of the bond is lower than the actual interest rate. So she is paying less interest on the bond she is holding. If she sold the bond and tried to refinance, she would have to pay the current interest rate which is higher. On the other side, if the company was low on cash or if they were trying to lower their debt to equity ratio of the balance sheet, she may want to sell the bond to generate cash and improve the debt/equity possibly strengthening the balance sheet. If she decides to show the security as "held to maturity" she gets a bigger bonus. Soo she better have a good story for the auditors for making this decision; otherwise the auditors will think she is doing it for selfish gain! In my opinion