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Chapter 13: Q3CA (page 658)

(Financial Statement Effect of Securities) Presented below are three unrelated situations involving equity securities.

Situation 1: A debt security, whose fair value is currently less than cost, is classified as available-for-sale but is to be reclassifiedas trading.

Situation 2: A noncurrent held-to-maturity portfolio with an aggregate fair value in excess of cost includes one particular debtsecurity whose fair value has declined to less than one-half of the original cost. The decline in value is considered to be permanent.

Situation 3: The portfolio of trading debt securities has a cost in excess of fair value of \(13,500. The available-for-sale debt portfoliohas a fair value in excess of cost of \)28,600.

Instructions

What is the effect upon carrying value and earnings for each of the situations above?

Short Answer

Expert verified

Trading securities decrease the company’s net income, and available for sale securities increase the company’s net income.

Step by step solution

01

Step 1:Reclassification of securities

Situation 1 does not affect the company’s carrying value and earnings because these are already recognised in available-for-securities.

02

Effect of held-to-maturity securities

Situation 2 does not affect the company’s carrying value and earnings because the given security is held-to-maturity security. In these types of securities, the amount is considered only at the time of the security’s maturity.

03

Adjustment of unrealized holding gain or loss

Situation 3 affect the carrying value and the earnings. Trading securities’ fair value is less than the cost value representing the unrealised loss that decreases the company's net income. Available-for-securities fair value is more than the cost representing unrealised gain that increases the company’s net income.

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Most popular questions from this chapter

(Fair Value Measurement) Presented below is information related to the purchases of common stock by Lilly

Company during 2017.

Cost Fair Value

(at purchase date) (at December 31)

Investment in Arroyo Company stock \(100,000 \) 80,000

Investment in Lee Corporation stock 250,000 300,000

Investment in Woods Inc. stock 180,000 190,000

Total \(530,000 \)570,000

Instructions

(Assume a zero balance for any Fair Value Adjustment account.)

(a) What entry would Lilly make at December 31, 2017, to record the investment in Arroyo Company stock if it chooses to

report this security using the fair value option?

(b) What entry(ies) would Lilly make at December 31, 2017, to record the investments in the Lee and Woods corporations,

assuming that Lilly did not select the fair value option for these investments?

EXCEL (Equity Securities Entries and Disclosures) Parnevik Company has the following securities in its

investment portfolio on December 31, 2017 (all securities were purchased in 2017): (1) 3,000 shares of Anderson Co. common

stock which cost \(58,500, (2) 10,000 shares of Munter Ltd. common stock which cost \)580,000, and (3) 6,000 shares of King Company

preferred stock which cost \(255,000. The Fair Value Adjustment account shows a credit of \)10,100 at the end of 2017.

In 2018, Parnevik completed the following securities transactions.

1. On January 15, sold 3,000 shares of Anderson’s common stock at \(22 per share less fees of \)2,150.

2. On April 17, purchased 1,000 shares of Castle’s common stock at \(33.50 per share plus fees of \)1,980.

On December 31, 2018, the market prices per share of these securities were Munter \(61, King \)40, and Castle $29. In addition, the

accounting supervisor of Parnevik told you that, even though all these securities have readily determinable fair values, Parnevik

will not actively trade these securities because the top management intends to hold them for more than one year.

Instructions

(a) Prepare the entry for the security sale on January 15, 2018.

(b) Prepare the journal entry to record the security purchase on April 17, 2018.

(c) Compute the unrealized gains or losses and prepare the adjusting entry for Parnevik on December 31, 2018.

(d) How should the unrealized gains or losses be reported on Parnevik’s income statement and balance sheet?

BE13-7 (L01) Kasten Inc. provides paid vacations to its employees. At December 31, 2017, 30 employees have each earned 2 weeks of vacation time. The employees’ average salary is $500 per week. Prepare Kasten’s December 31, 2017, adjusting entry.

In determining the amount of a provision, a company using IFRS should generally measure:

(a) Using the midpoint of the range between the lowest possible loss and the highest possible loss.

(b) Using the minimum amount of the loss in the range.

(c) Using the best estimate of the amount of the loss expected to occur.

(d) Using the maximum amount of the loss in the range.

Leon Wight, a newly hired loan analyst, is examining the current liabilities of a corporate loan applicant. He observes that unearned revenues have declined in the current year compared to the prior year. Is this a positive indicator about the client’s liquidity? Explain.
See all solutions

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