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Q: Write a memo as the auditor to the client telling how: (1) and (2) should...

Q: Write a memo as the auditor to the client telling how: (1) and (2) should be classified on balance sheet (options are available for sale, held to maturity, or trading)?

(1)

Watson holds bonds issued by Fowler Corp. The bonds have an amortized cost of $600,000, and their fair value at December 31, 2016, is $700,000. Watson intends to hold the bonds until they mature on December 31, 2022.

(2)

Watson has invested idle cash in the equity securities of several publicly traded companies. Watson intends to sell these securities during the first quarter of 2017 when it will need the cash to acquire seasonal inventory. These equity securities have a cost basis of $500,000 and a fair value of $620,000 on December 31, 2016.

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Answer #1
1) Since your(Watson Co) intention to hold the bonds is until maturity, the bonds should be classified as Held to maturity securities.
When the intent is to hold investments until maturity, they are classified as held to maturity securities
2) When Securities are neither classified as to held until maturity or trading securities they are classified as available for sale securities
Trading securities are the one where the intent is to sell them in the short term to earn profits, in this case since you (Watson) are selling the shares for reason being availability of cash and not to earn any profits.
The investment would be classified as Available for sale
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