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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.

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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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 ...

Solution Summary

Four unrelated situations involving equity securities that have readily determinable fair values are determined.

See Also This Related BrainMass Solution

Qtip Corp owns stock in Maxey Corp. The investment represents a 10% interest and Qtip is unable to exercise significant influence over Maxey.
The Maxey stock was purchased by Qtip on January 1, 2002 for $23,000. The stock consistently pays an annual dividend to Qtip of $2,000. Qtip classifies the stock as available for sale. Its fair value at December 31, 2009 was $21,600. The amount was properly reported as an asset in the balance sheet. Due to the development of a new Maxey product line, the market value of Qtip's investment rose to $27,000 at December 31, 2010.
The Qtip management team is aware of the provisions of SFAS No. 115. The possibility of changing the classification from available for sale to trading is discussed. This change is justified, the managers say, because they intend to sell the security at some point in 2011 so that they can realize the gain.
a. Discuss the role that managerial intention playing in the accounting treatment of equity securities that have a readily determinable fair value under SFAS no. 115.
b. What income statement effect if any would the change in classification have for Qtip?
c. Are there any ethical considerations that need to be considered?
d. Opponents of SFAS No. 115 contend that allowing a change in classification masks effects of unrealized losses and results in improper matching of market value changes with accounting periods. Describe how the accounting treatment and proposed change in classification would result in this sort of mismatching.

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