You are an accountant for Davanzo Company. The president of the company calls you into her office and says, I want to ask you about two issues. First, we need to sell one of our investments to raise $1 million because I think I have found a better invest- ment. We could sell the bonds of Company X, which are currently worth $1 million even though they have an amortized cost basis of $950,000. But I dont want to sell them because I like the steady stream of cash flow we get related to interest. Or we could sell the bonds in that dog, Company Z. These bonds are also worth $1 million, but they cost us $1.2 million. I hate to admit we made such a big mistake, and if they can somehow avoid bank- ruptcy, we may actually recover our investment. And then theres that loss. I dont want to report that. Second, I am going to use the $1 million to buy about 20% of the shares of Company M, but I seem to remember that there is some accounting rule that might affect how much we buy. I was also wondering about buying some of Company Ms convertible preferred stock so we can convert that into a large ownership position in the future. Let me know what you think. You are aware that Company M is a new company that is not yet listed on the stock market, has been making losses, and is expected to continue making losses for a few more years.
From financial reporting and ethical perspectives, discuss the issues raised by this situation.
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