(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
Trading securities in the current assets section have a fair value that is $4,200 lower than cost.
A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.
An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but
is to be reclassified as current.
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 market
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.
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.
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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