(Issues Raised about Investment Securities) You have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in your accounting background because the company has experienced a series of financial reporting surprises over the last few years. Recently, the controller has learned from the company’s auditors that there is authoritative literature that may apply to its investment in securities. She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements.Situation 1: Trading debt securities in the current assets section have a fair value that is $4,200 lower than cost.Situation 2: A trading debt security whose fair value is currently less than cost is transferred to the available-for-sale category.Situation 3: An available-for-sale debt security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.Situation 4: The company’s portfolio of held-to-maturity debt securities consists of the bonds of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an impairment. However, at the end of the current year, the fair value of the security had appreciated to twice the original cost.Situation 5: The company has purchased some equity securities that it plans to hold for less than a year. The fair value of the securities is $7,700 below its cost.InstructionsWhat is the effect upon carrying value and earnings for each of the situations above? Assume that these situations are unrelated.
(Issues Raised about Investment Securities) You have just started work for Warren Co. as part of the controller’s group involved in current financial reporting problems. Jane Henshaw, controller for Warren, is interested in your accounting background because the company has experienced a series of financial reporting surprises over the last few years. Recently, the controller has learned from the company’s auditors that there is authoritative literature that may apply to its investment in securities. She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements.
Situation 1: Trading debt securities in the current assets section have a fair value that is $4,200 lower than cost.
Situation 2: A trading debt security whose fair value is currently less than cost is transferred to the available-for-sale category.
Situation 3: An available-for-sale debt security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.
Situation 4: The company’s portfolio of held-to-maturity debt securities consists of the bonds of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an impairment. However, at the end of the current year, the fair value of the security had appreciated to twice the original cost.
Situation 5: The company has purchased some equity securities that it plans to hold for less than a year. The fair value of the securities is $7,700 below its cost.
Instructions
What is the effect upon carrying value and earnings for each of the situations above? Assume that these situations are unrelated.
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