What are the effects on equities?

Financial Statement Effect of Equity Securities

Presented below is a situation involving equity securities:

An equity security, whose fair value is currently less than cost, is classified as available ‐ for ‐ sale but is to be reclassified as trading.

Instructions

What is the effect upon carrying value and earnings for the scenario presented?

Just do response each posted # 1 to 3 down below only.

Posted 1

Hi Dr. Riley and class,

Excuse me for posting late, I have been sick with the flu for the past couple of weeks.

In this scenario, an equity security, whose fair value is currently less than cost, is classified as available ‐ for ‐ sale but is to be reclassified as trading.

For the balance sheet, these securities should be recorded as fair market value according to the date of the statements. When stating values under Stockholders’ Equity, “the statement of stockholders’ equity should show the changes in fair market value of the investments as a separate component of stockholders’ equity, Investopedia, 2018). In the Statement of Cash Flows, any difference in fair value will appear under the operating section, while cash received or used for securities will be in the investing section.

In this case, since the equity is being reclassified as held-for-trading, changes in the fair value of investments as income or loss, should show on the income statement.

Posted 2

Hello all,

Securities that are sold or traded have certain types of classifications, and are done so by the current fair value price of the security that is being sold or traded. The reporting of these transactions must happen at the time of the trade or sale in order to avoid fraud like the change of value of the security or no reporting at all which may be beneficial for a company. When looking at the carrying value it is decreased if the security cost is greater than the fair value (unrealized loss), and is as a loss with stockholder’s equity. When a security is traded the income of the security must also be reported with the income statement that follows the trade. There are some differences with selling and trading, but when it comes to classifications/reclassifications the steps are similar.

Reference:

Kieso, D. E., Weygandt, J. J., & Warfield, D. T. (2016).Intermediate Accounting; 16th Edition. Various: John Wiley & Sons, Inc.

Posted 3

Hello Dr. Riley and Class,

Available for sale securities and trading securities are treated differently in accounting although both have the same classification as debt or equity securities. Securities not classified as held-to-maturity or trading securities are available-for-sale (Kieso, Weygant, & Warfield, 2016, p. 900). Available-for-sale security is reported at fair value and its unrealized gains or losses are not included in earnings and is classified as other comprehensive income or losses in a separate section under the stockholders’ equity in the balance sheet until they are sold (Kieso, Weygant, & Warfield, 2016, p. 903). Besides, available-for-sale debt or equity security invested with the purpose of selling before it reaches maturity, or it could be held for a long period of time without a maturity date. On the other hand, trading securities mainly purchased for short term selling. It tends to be purchased and sold for a quick capital gain. It is also reported at a fair value like available-for-sale security, but instead, the unrealized gains and losses are included in earnings and reported as part of net income.

Since the two types of securities are different in term of investment length and recorded differently in the balance sheet, they cannot be reversed or reclassified from one to another. When the company reclassed the losses of the available-for-sale to the trading security, the net income was reduced instead of reducing the comprehensive income of the stockholder’s equity. The comprehensive income includes unrealized gains and losses on available-for-sale investments.

Reference:

Kieso, D. E., Weygandt, J. J., & Warfield, D. T. (2016).Intermediate Accounting; 16th Edition. Various: John Wiley & Sons, Inc.

 

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