Kirk Company acquired shares in the equity of both Company A and Company B. We h

Question

Kirk Company acquired shares in the equity of both Company A and Company B. We have the following information from the public markets about Company A and Company B’s investment value at the time of purchase and at two subsequent dates:

Security                       Cost                 T = 1                T = 2

            A                     $950                $850                $900

            B                      250                  180                  350

Kirk Company will report what initial value of its portfolio assuming that they are all marketable equity securities?

If we assume the investments are equity securities, how will the company recognize the investment at T = 1 on their balance sheet and income statement if the securities are considered available-for-sale and if they are considered trading securities?

Available for Sale

Income Statement:

Balance Sheet:

Trading Securities

Income Statement:

Balance Sheet:

Explanation / Answer

(1)

Initial value of portfolio = Investment value of purchase of both securities

= $950 + $250 = $1200

(2)

(a) Available for sale (AFS)

Unrealized loss, Security A ($) = 950 - 850 = 100

Unrealized loss, Security B ($) = 250 - 180 = 70

Total unrealized loss ($) = 100 + 70 = 170

For AFS securities, unrealized loss is recorded in Income Statement under Other Comprehensive Income (which increases by $170). In balance sheet, Accummulated Other Comprehensive Income under Equity section will decrease by $170.

(b) Trading securities

Unrealized loss on Trading securities is included in Net income in Income statement, so Net Income will decrease by $170. Accordingly, in Balance Sheet, Reatined Earnings will be lower by $170.

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