Level 1 is most preferred level 3 least preferred 180

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Unformatted text preview: other observable amounts (for example, quoted values for similar items, or important inputs such as interest rates), and level 3 inputs are unobservable, like the company's own assumptions. Level 1 is most preferred; level 3 least preferred. 180. If Jaycom classifies the securities as available for sale, none of the market value changes would be reflected in net income. However, all market value changes would be reflected in net income if Jaycom classifies these securities as trading. This demonstrates how some generally accepted accounting principles can potentially be used to manipulate earnings. To maximize income the company could classify securities that have decreased in value as available for sale while classifying as trading securities those that have increased in value. One way to justify this would be to argue that securities that were increasing in value could be sold at any time. The managers could also argue that they held declining securities indefinitely or until they felt the decline was over. However, appropriate accounting procedures require that an investor assign a reporting classification to each security at acquisition, with the classification chosen based on the company's intent at that time. Reasons for transfers between classifications must be explained in footnote disclosures. (3.) The investment would be recorded at cost. The acquisition of the subsidiary is recorded the same way under both methods. If accounted for as securities available for sale, dividends are recorded as revenue by the parent, and the investment is recorded at fair value at each balance sheet date. (2.) The investment would be recorded at cost. The equity method requires that a proportionate share of dividends and reported earnings be recorded as adjustments to respectively decrease and increase the investment account, with the proportion of reported revenue included in net income of the parent. Differences between the price paid for the investment and the underlying book value must be analyzed and amortized, if appropriate. 181. (1.) In order to use the equity metho...
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