Respond to the Following Question with the Presumption That the Guidance

question 43

Essay

Respond to the following question with the presumption that the guidance provided by the new Accounting Standards Update is being applied.
Stanhope Associates holds the following investments:
1. 10 shares of Blackstone equity, held for long-term investment.
2. 10 shares of Erickson equity, held for risk management.
3. 10 shares of AT&E equity, held for immediate resale.
4. 10 bonds issued by Filo Inc., held for long-term investment.
5. 10 bonds of SimSung, held for risk management.
6. 10 bonds issued by Attachi, held for immediate resale.
Required:
For each investment, indicate: (a) the accounting approach that will be used to account for the investment, and briefly explain why that approach is appropriate, and (b) the effect on earnings of an increase in the fair value of the investment in the period following acquisition of the investment, assuming that Stanhope does not sell the investment. You may group the specific investments if they have the same answers. Identify the investments you are including in the group.

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Definitions:

Perfectly Competitive Industry

A Perfectly Competitive Industry is characterized by many sellers and buyers, free entry and exit, and a product that is identical across suppliers, leading to no single entity having market control.

Marginal Cost

The additional cost of producing one extra unit of a good or service.

Total Revenue

The total amount of money a company receives from selling its goods or services before any expenses are subtracted.

Profit-Maximizing Output

The point of production where a company reaches its maximum profit, occurring when marginal revenue is equal to marginal cost.