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 portfolio 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 consists of the common stock of one company. At the end of the prior year, the market value of the security was 50% of 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

1. A noncurrent portfolio of available for sale equity securities with an aggregate market value in excess of rate includes one security whose market value has declined to less than half of the original rate. The decline in value is considered other than temporary.

Value of stock considered to be impaired, if there is a decline in stock value which is considered other than temporary. Such stock is considered as non current portfolio, should not be considered as trading security.

If there any loss has been arrived on security which is considered as available for sale due to the difference between the cost and fair value then such loss should be recognized in income statement. The basis for new asset will be the fair value as on the date of loss is recognized.

2.The criteria of classifying it on the basis of current & non current asset & liability on cap value of 2000 or 5000 is incorrect. An asset should be classified as current or non current on the basis if same can be liquidated in a span of 12 months or within operating cycle whichever happens first.

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1. Marketable security should be disclosed as current asset in balance sheet and it should be measured at fair value, only when such security is reclassified as from trading security to available for sale.

Accumulated unrealized losses or gains to the date of reclassification from trading security to available for sale should be recognized as part of net income. Comprehensive income of current period would include a gain or loss to date of reclassification from the beginning of the period.

1. When the security has appreciated 2 times the original, we cannot revalue it upwards due to principle of conservatism. So, in this case, we can revalue it to the extent of devaluation done earlier , which has cap value of the original cost. In this case, when the stock rises up, the profit revalued upto original cost is charged to profit & loss account. The profit realised over & above the original cost is charged to other comprehensive income.