Exercise 8-2: The following information was extracted from the December 31, 2014

Question

Exercise 8-2:

The following information was extracted from the December 31, 2014, current asset section of the balance sheets of four different companies:

                                                Wearever Fabrics   Frames Corp. Pacific Transport Video Magic  

Trading securities                    $800,000                 $490,000        $645,000              $210,000                  

Available-for-sale-securities    130,000                     40,000          250,000                   85,000

Short-term equity invest.        $930,000                 $530,000         $895,000                $295,000

There were no transactions in short-term equity securities during 2015, and as of December 31, 2015, the controllers of each company collected the following information:

                                                Wearever Fabrics    Frames Corp. Pacific Transport   Video Magic

Trading securities                   $820,000                  $480,000        $625,000                $220,000

Available-for-sale securities   122,000                     52,000          246,000                    88,000     

Short-term equity invest.        $942,000                $532,000          $871,000            $308,000

a. Compute the change in the wealth levels of each of the four companies due to the market value changes in their equity investments.

b. Compute the effect on 2015 reported income for each of the four companies due to the market value changes in their equity investments.

c. Explain why the answers to (a) and (b) are not the same.

d. How would 2015 reported income change for each company if each chose to use the fair market value option for the available-for-sale securities?

Explanation / Answer

as on 12/31/14 Wearever Fabrics    Frames Corp.   Pacific Transport Video Magic Trading securities 800000 490000 645000 210000 Available-for-sale-securities 130000 40000 250000 85000 Short-term equity invest.   930000 530000 895000 295000 as on 12/31/15 Wearever Fabrics    Frames Corp.   Pacific Transport Video Magic Trading securities 820000 480000 625000 220000 Available-for-sale-securities 122000 52000 246000 88000 Short-term equity invest.   942000 532000 871000 308000 All the above securities have to be recorded at fair market value. Gain or loss on trading securities has to be attibuted to operating income Available-for-sale and short tem equity investement attribute gains and losses to stockholders' equity Wearever Fabrics    Frames Corp.   Pacific Transport Video Magic Trading- operating income -20000 10000 20000 -10000 available for sale- Shareholders Equity 8000 -12000 4000 -3000 Short tem equity- Shareholders Equity -12000 -2000 24000 -13000 Wearever Fabrics    Frames Corp.   Pacific Transport Video Magic a) change in wealth levels -4000 -14000 28000 -16000 b) effect on 2015 reported income -20000 10000 20000 -10000 c) Gain or loss on trading securities has to be attibuted to operating income c) Available-for-sale and short tem equity investement attribute gains and losses to stockholders' equity d) available-for-sale securities recorded at fair market value

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