(Issues Raised about Investment Securities) You have just started work
for Warren Co. as part of the controller’s group involved in current
financial reporting problems. Jane Henshaw, controller for Warren, is
interested in your accounting background because the company has
experienced a series of financial reporting surprises over the last few
years. Recently, the controller has learned from the company’s auditors
that there is authoritative literature that may apply to its investment
in securities. She assumes that you are familiar with this pronouncement
and asks how the following situations should be reported in the
financial statements
Situation 1
Trading securities in the current assets section have a fair value that is $4,200 lower than cost.
Situation 2
A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.
Situation 3
An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.
Situation 4
A company’s portfolio of available-for-sale securities consists of the common stock of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an other than temporary impairment. However, at the end of the current year the fair value of the security had appreciated to twice the original cost.
Situation 5
The company has purchased some convertible debentures that it plans to hold for less than a year. The fair value of the convertible debentures is $7,700 below its cost.
Instructions
What is the effect upon carrying value and earnings for each of the situations above? Assume that these situations are unrelated.
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