At the end of its most recent fiscal year, Shangri-La Company owned the following investments.

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Other assets had a book value of $2.4 million and liabilities had a book value of $2.8 million. Shangri-La’s net income for 2004 was $280,000. If the company sold investment A at the end of the year for cash, what effect would the sale have on its financial statements and return on assets (ignoring the effect of income taxes)? Assume that assets are reported on the financial statements at historical cost. What effect would the sale of investment B have on the company’s financial statements and return on assets? Compare these amounts to those that would be reported if no investments were sold. Does this example help explain why mark-tomarket accounting is often required by GAAP? Discuss.


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