Presented below are four unrelated situations involving equity securities that h

Question

Presented below are four unrelated situations involving equity securities that have readily determinable fair values.

Situation 1: A noncurrent portfolio with an aggreagte market value in excess of cost includes one particular security whose market value has declined to less than half of the original cost. The decline in value is considered to be other than temporary.

Situation 2: The balance sheet of a company does not classify assets and liabilities as current and noncurrent. The portfolio of marketable equity securities includes securities normalled considered to be trading securities that have a net cost in excess of market value of $2,000. The remainder of the portfolio is considered noncurrent and has a net market value in excess of $5,000.

Situation 3: A marketable equity security, whose market value is currently less than cost, is classified as a noncurrent security that is available for sale but is to be reclassified as a trading security.

Situation 4: A company's noncurrent portfolio of marketable equity securities consists of the common stock of one company. At the end of the prior year the market value of the security was 50 percent of original cost, and the effect was properly reflected in the balance sheet. However, at teh end of the current year the market value of the security had appreciated to twice the original cost. The security is still considered noncurrent at year-end.

Determine the effect on classification, carrying value, and earnings for each of the proceding situations. Complete your response to each situation before proceeding to the next situation.

Explanation / Answer

Situation 1: Since it is a permanent decline in the value of the security. The fair value shall be revised and the declined value has to be reflected in the books, The difference in the new value from old value should be charged to the Profit & Loss account.

Situation 2: The criteria of classifying it on the basis of current & non current asset & liability on cap value of 2000 or 5000 is incorrect. An asset should be classified as current or non current on the basis if same can be liquidated in a span of 12 months or within operating cycle whichever happens first.

Situation 3: When a security is reclassified as trading security, it is to be valued at cost or market value whichever is lower. In this case, the market vakue is lower . Also the difference should be charged to profit & loss account.

Situation4 : When the security has appreciated 2 times the original, we cannot revalue it upwards due to principle of conservatism. So, in this case, we can revalue it to the extent of devaluation done earlier , which has cap value of the original cost. In this case, when the stock rises up, the profit revalued upto original cost is charged to profit & loss account. The profit realised over & above the original cost is charged to other comprehensive income.

Related Questions

Navigate

• Browse (All)
• Browse P
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.