Question

Collin Zucs, CFO of Travel United, Inc., invested some of the firm's excess cash in the common shares of what he thought were three undervalued securities. At year-end, he reviewed how the portfolio of securities had done.

Security Name	Cost Basis	Market Value at Year-End	Classification
Microsoft Corporation	$100,000	$134,200	Trading security
Pfizer, Inc.	75,000	80,300	Trading security
Boeing, Inc.	50,000	52,800	Available-for-sale security
	$225,000	$267,300

Required

1. Calculate the value that would be assigned to the portfolio of securities on Travel United's balance sheet at year-end.

$Answer

2. Calculate the income statement effect of the portfolio of securities at year-end.

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3. Calculate the income statement effect of the portfolio of securities at year-end assuming all securities are classified as available-for-sale.

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4. Are the company's reported earnings impacted by whether the portfolio of securities are classified as trading versus available-for-sale?

Answer

Will the company's income taxes be impacted?

Answer 1

1. $267,300

Trading and available for sale securities are valued at their fair values at year-end and hence the value assigned to the portfolio would be the fair value which is $267,300.

2. $39,500 Unrealized Gain

Security Name	Cost $	Market Value $	Unrealized Gain (Loss) $
Microsoft Corporation	100000	134200	34200
Pfizer Inc.	75000	80300	5300
Total	175000	214500	39500

Only the unrealized gain (loss) on trading securities is reported on the income statement. Hence, the effect of the portfolio on the income statement will be to the extent of the unrealized gain on the trading securities which is $39,500.

3. $0

The unrealized holding gain or loss on available for sale securities is reported under the stockholders' equity section of the balance sheet and not in the income statement. Hence, there would be no effect on the income statement if all securities are classified as available for sale.

4. Yes.

Classifying the portfolio as trading securities would affect the income statement while classifying the same as available for sale would impact the stockholders' equity and hence, the classification would determine the company's reported earnings.

No.

The company's income taxes would not be impacted due to the classification since gains are taxed only when realized.

3.