Question

Cited here are four unrelated cases involving marketable equity securities:

1. A noncurrent portfolio of available-for-sale equity securities with an aggregate market value in excess of cost; includes one particular security whose market value has declined to less than one-half of the original cost.

2. The balance sheet of a company does not classify assets and liabilities as current and noncurrent. The port- folio of available-for-sale equity securities includes securities normally considered current that have a net cost in excess of market value of $2,000. The remainder of the portfolio has a net market value in excess of cost of $5,000.

3. An available-for-sale marketable equity security, whose market value is currently less than cost, is classified as noncurrent but is to be reclassified as current.

4. A company’s noncurrent portfolio of marketable equity securities consist of the common stock of one company. At the end of the prior year, the market value of the security was 50% of the original cost, and this effect was properly reflected in a Valuation Adjustment account. However, at the end of the current year, the market value of the security had appreciated to twice the original cost. The security is still considered noncurrent at year-end.

Required: For each of the cases, describe how the information provided affects the classification, carrying value, and income reported for that company’s investment securities.

Answer 1

Answer 1.

This can neither be classified as debt securities held till maturity nor as trading securities. These are categorized as available for sale securities and are necessary to be reported at fair value with unrealized gains and losses encompassed in shareholders equity. The carrying value will be reduced by the waning in market value and unrealized losses will be shown in shareholders equity section. Thus earnings will not be affected due to this.

Answer 2.

The trading securities are to be stated at fair value with unrealized gains and losses counted in earnings. The trading securities shall be presented as in the balance sheet at fair value and the drop in market value will be shown as unrealized losses and will decrease earnings. The left over securities shall be treated as available for sale securities and shall be shown at market value with the gain being transferred to shareholders equity section.

Answer 3.

The trading securities are to be stated at fair value with unrealized gains and losses counted in in earnings. The trading securities shall be shown as in the balance sheet at fair value and the decrease in market value will be treated as unrealized losses and will lessen earnings.

Answer 4.

It shall be categorized as available for sale securities and shall be shown at market value with the gain being moved to shareholders equity section.