Available-for-Sale Securities
The following are four unrelated situations involving investments in available-for-sale securities:
Situation I
A portfolio of available-for-sale debt securities with an aggregate fair value in excess of amortized cost includes one particular security whose fair value has declined to less than one-half of its amortized cost. The decline in value is considered to be other than temporary.
Situation II
The portfolio of available-for-sale debt securities includes securities that have an amortized cost in excess of fair value of $500. The remainder of the portfolio has a net fair value in excess of amortized cost of $1,000.
Situation III
An available-for-sale debt security, whose fair value is currently less than its amortized cost, is reclassified as a trading security.
Situation IV
A company’s portfolio of available-for-sale securities consists of the bonds of one company. At the end of the prior year, the fair value of the security was 95% of amortized cost, and the effect was properly reflected in an allowance account. However, at the end of the current year, the fair value of the debt security had appreciated to 102% of the amortized cost.
Required:
Explain the effect on classification, earning value, and earnings for each of the preceding situations.
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Intermediate Accounting: Reporting And Analysis
- A security in a portfolio of available-for-sale securities is transferred to the trading category. The security should be transferred between the corresponding portfolios at: a. book value at date of transfer if higher than the fair value at date of transfer b. fair value at date of transfer, regardless of its cost c. cost, regardless of the fair value at date of transfer d. lower of its cost or fair value at date of transferarrow_forwardWhen the market value of a companys available-for-sale securities is lower than its cost, the difference should be: a. shown as a liability. b. shown as a valuation allowance added to the historical cost of the investments. c. shown as a valuation allowance subtracted from the historical cost of the investments. d. No entry is made, the securities are shown at historical cost.arrow_forwardCroger Manufacturing Inc. makes an investment in securities that they intend to hold for a period of time that is unspecified. How will this investment be reported? Multiple Choice Fair value. Present value. Historical cost. Lower of cost or market.arrow_forward
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