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Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281

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BuyFindarrow_forward

Intermediate Accounting: Reporting...

3rd Edition
James M. Wahlen + 2 others
ISBN: 9781337788281
Textbook Problem
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Investments in Securities

Cane Company has two portfolios of investments in marketable debt securities. It classifies one as trading securities and the other as available-for-sale securities. Cane does not have the ability to exercise significant influence over any of the companies in either portfolio. It sold some securities from each portfolio during the year. Cane reclassified one of the securities in the available-for-sale category to the trading category when its fair value was less than its amortized cost. At the beginning and end of the year, the aggregate cost of each portfolio exceeded its aggregate market value by different amounts.

Required:

  1. 1. Explain how Cane measures and reports the income statement effects of the securities sold during the year from each portfolio.
  2. 2. Explain how Cane accounts for the reclassified security.
  3. 3. Explain how Chine reports the effects of changes in the fair value of investments in each portfolio on its balance sheet as of the end of the year and on its income statement for the year. Do not discuss the securities sold.
  4. 4. Explain gains trading. Can Cane use gains trading on either portfolio? Does gains trading raise ethical issues?

1.

To determine

Explain the manner in which Company C measures and reports the income statement effects of the securities that were sold during the year from each portfolio.

Explanation

Investment: It refers to the process of using the currently held excess cash to earn profitable returns in future. The investments can be made in equity securities such as shares or debt securities such as bonds.

(1) Trading securities: these are the securities which are purchased to earn the profits due to changes in their market prices.

(2) Available for sale securities: these are the securities which are not intended to be sold in the near future and there is no intension to hold the securities till their maturity...

2.

To determine

Explain the way in which Company C would accounts for the reclassified securities.

3.

To determine

Explain the way in which Company C reports the effects of changes that happened in the fair value is reported in the balance sheet as of the end of the year and on the income statement for the year.

4.

To determine

Describe gain trading, explain whether Company C can use gain trading on either portfolio and identify whether gain trading rise any ethical issues.

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