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In: Accounting

Giant Foods accumulates large amounts of excess cash throughout the year. It typically invests these funds...

Giant Foods accumulates large amounts of excess cash throughout the year. It typically invests these funds in marketable securities until they are needed. The company's most recent financial statements reported a Rs.594,000 unrealized loss on short-term investments. Footnotes to these financial statements disclosed that Giant classifies its short-term investments as available-for-sale securities. (15) 3 Required: i. Explain the meaning of Giant's unrealized loss on short-term investments. ii. How is the unrealized loss reported in Giant's financial statements? iii. Is the unrealized loss included in the computation of Giant's taxable income? Explain. iv. Evaluate the mark-to-market concept from the perspective of Giant's shortterm creditors.

Solutions

Expert Solution

i.Unrealised loss on short-term investments , mean the decrease in fair value of the investments , between two dates of the fiscal period, usually, the beginning & ending days of the accounting year.
As these investments are invested & held for sale at a good-increased price , to make profit on sale, they are measured at year-ends . For change in fair values & accounted at that value.
ii.These AFS investments are also called Fair Value Through Other Comprehensive Income (FVTOCI) securities---- ie. The increase/decrease in their fair values are reported as Other Comprehensive income, under the Stockholders'Equity section , on the liabilities side of the Balance Sheet.The other side of the journal entry will be the Fair Value Adjustment a/c maintained as the Investment's contra-asset a/c. Reading together , both these two a/cs , we get to know the carrying value of the AFS Investment----just like accumulated depreciation of equipment, furniture, etc----appears on the asset side, next to investments.
So, the unrealised loss will be debited to the OCI --whichin turn will reduce the AOCI balance & also the total Stockhloders' Equity , on the Liabilities side of the Balance Sheet.
iii. Is the unrealized loss included in the computation of Giant's taxable income? Explain
NO.As it does not pass through the Income statement, unrealised loss on AFS investments , are not included in computation of Giant's taxable income.
But on sale of these investments, all the related a/cs are reversed & gain/loss (the plu-in-figure of the JE), is taken to the Income statement, as realised gain/loss on sal eof AFS.At that time, it is included in computing taxable income.
iv.Mark-to-market concept is stating the assets/ liabilities at market values , so that the Balance sheet reflects the most accurate value--- which are alos more realistic and helpful in decision-making.
Mark-to-market concept from the perspective of short-term creditors, helps to assess the exact quantum & timing of finances that may be required to settle these obligations---without any heartburns , on their part , or any frantic search for funds at the last moment, on the part of the company----- which will go a long-way in building & safeguarding trust & confidence.The creditors may also be thankful , that their loans are settled at present values, instead of outdated values, whose purchasing power , might have reduced due to inflation.

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