At the end of the first year of operations, Key Company had a current equity securities...

At the end of the first year of operations, Key Company had a current equity securities portfolio classified as available‐for‐sale securities with a cost of $500,000 and a fair value of $550,000. At the end of its second year of operations, Key had a current equity securities portfolio classified as available‐for‐sale securities with a cost of $525,000 and a fair value of $475,000. No securities were sold during the first year. One security with a cost of $80,000 and a fair value of $70,000 at the end of the first year was sold for $100,000 during the second year.

Required:

How should Key Company report the preceding facts in its balance sheets and income statements for both years? Discuss the rationale for your answer.

How would your answer differ if the security had been classified as trading securities?

Expert Solution

lass of Securities	Types of Securities	Disclosure on the Balance Sheet	Treatment of Temporary Changes of Value
Held to Maturity	Debt	Amortized cost	Not recognized
Available for Sale	Debt and Equity	Fair market value	Reported in stockholders’ equity
Trading	Debt and Equity	Fair market value	Reported on the income statement
Equity method	Equity	Historical cost adjusted for changes in the net assets of the investee	Not recognized

Balance Sheet

The balance sheet lists the marketable securities as an asset. Usually, the securities are stated at fair market value as of the date of the financial statements. Held to maturity, securities may be listed at cost, but this has become fairly uncommon.

Income Statement

The income statement may show the changes in the fair market value of investments as an income or loss line item, but only if the securities have been classified as held-for-trading securities.

Statement of Stockholders' Equity

If the securities are classified as available for sale, the statement of stockholders' equity should show the changes in fair market value of the investments as a separate component of stockholders' equity.

Statement of Cash Flows

The statement of cash flows may show the changes in fair market value of the investments as a reconciling item in the operating section of the statement. The investing section of the statement always shows the cash used to purchase securities or the cash received from the sale of securities.

Disclosures

Disclosures to the financial statements describe how the marketable securities have been classified. They also provide further detail as to what kinds of securities are owned by the company and what transactions may have taken place during the fiscal year

ekkarill92 answered 1 year ago

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At the end of the first year of operations, Key Company had a current equity securities...

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