Question

Dieman Dealers has an investment in Tommy Corporation bonds that Dieman accounts for as a trading security. Tommy Corporation's bonds are publicly traded and the prevailing market price indicates that Dieman's investment is worth $20,000. However, Dieman management believes that the bond market is generally overvalued, and their analysis of the Tommy investment suggests to them that it is worth $18,000. Dieman should carry the Tommy investment on its balance sheet at:

Answer 1

Answer:

$20,000

Explanation:

The reason is that the standard specifically addresses the issue and says that the publicly trading security must be recorded at the market price not on the management estimation. If it was allowed we would never see a loss in the financial statement because everyone would argue that our management estimation says that the asset is worth $1 million more than the current market price. So this is prohibited by the accounting standards.