P & P owns the following securities. Information relating to the below available

Question

P & P owns the following securities. Information relating to the below available equity securities is presented.
Security Cost Market Value, December 31, 2012
A $10,000,000 $40,000,000
B $20,000,000 $14,000,000
C $5,000,000 $15,000,000
D $20,000,000 $12,000,000
Total $55,000,000 $81,000,000
P & P is concerned about meeting the annual earnings estimate. The CEO has made two proposal related to yearend investment activities:
1. Sell securities A and C. Assume the company will sell the securities 12/31/05 market value.
2. Tell the auditors that the company has decided to sell all of the securities in the near term. This decision is the basis reclassification of the securities from available-for-sale to trading.
Requirement: Compute the amount of the effect of each proposal on P & P’s Income statement. Ignore Income tax consideration.
Pension

Explanation / Answer

1. Company will sell the securities 12/31/05 market value of 40,000,000

2.

Under proposal 1 the income statement will show higher earnings by $40 million as follow

Under proposal two the income statement earnings will be higher by $26 million asfollows

Cost MV Gain/loss A $    10,000,000 $   40,000,000 $ 30,000,000 C $      5,000,000 $   15,000,000 $ 10,000,000 Total $ 40,000,000

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