Some Accounting for Investments
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1. Presented below are four unrelated situations involving equity securities that have readily determinable fair values.
Situation 1
A noncurrent portfolio with an aggregate market value in excess of cost includes one particular security whose market value has declined to less than half of the original cost. The decline in value is considered to be other than temporary.
Situation 2
The balance sheet of a company does not classify assets and liabilities as current and noncurrent. The portfolio of marketable equity securities includes securities normally considered to be trading securities that have a net cost in excess of market value of $2,000. The remainder of the portfolio is considered noncurrent and has a net market value in excess of $5,000.
Situation 3
A marketable equity security, whose market value is currently less than cost, is classified as a noncurrent security that is available for sale but is to be reclassified as a trading security.
Situation 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 percent of original cost, and the effect was properly reflected in the balance sheet. 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:
Determine the effect on classification, carrying value, and earnings for each of the preceding situations. Complete your response to each situation before proceeding to the next situation.
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Solution Summary
Four unrelated situations involving equity securities that have readily determinable fair values are determined.
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Below is the tutorial
Situation 1
Generally accepted accounting principles dictate that declines in value considered to be other than temporary have to be accounted for by the company as realized loss in its income statement and that the value of the investment be written down to its fair value.
Effect on classification - NONE. This will not result to reclassification of the portfolio at all
Effect on carrying value - decrease to the fair value of the investment
Effect on earnings - a loss equal to the decrease in value will be reported as part of earnings
Situation 2
Regardless of whether the company classify assets and ...
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