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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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When the market value of a company’s portfolio of available-for-sale securities is lower than its cost, the difference should be:

  1. a. accounted for as a valuation allowance deducted from the asset to which it relates
  2. b. accounted for as an addition in the shareholders’ equity section of the balance sheet
  3. c. accounted for as a liability
  4. d. disclosed and described in a note to the financial statements but not accounted for

To determine

Identify the way in which the decline in the market value of a company’s portfolio of available-for-sale securities below the cost should be accounted.

Explanation

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.

Any change in the fair value of an investment in available-for-sale securities would be adjusted through the allowance account (adjunct or contra account to the investment account). To record the decrease in the fair value of company’s portfolio of available-for-sale securities below the cost, allowance for change in fair value of investment account would be credited...

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