CPAnet Forum: Market securities- Confusion

Active Topics

Memberlist

Help

FAR STUDY GROUP
CPAnet Forum : FAR STUDY GROUP

Topic: Market securities- Confusion (

Topic Closed)

Author

Message

<< Prev Topic | Next Topic >>

CPA_Starter
Regular
Regular

Joined: 12 Dec 2008
Online Status: Offline
Posts: 123

Posted: 02 Jul 2009 at 18:53 \| IP Logged

Sun Corp. had investments in marketable equity securities costing
$650,000. On June 30, 20X2, Sun decided to hold the investments
indefinitely and accordingly reclassified them from trading to available-
for-sale on that date. The investments' market value was $575,000 at
December 31, 20X1, $530,000 at June 30, 20X2, and $490,000 at
December 31, 20X2.
What amount of loss from investments should Sun report in its 20X2
income statement?

Ans:

$45,000 loss should be reported in the 20X2 income statement.

Rule: When marketable equity securities are transferred between trading
and available-for-sale, the transfer is made at fair value, and the
difference (if any) is recorded as unrealized loss and charged to the
income statement. The new carrying amount becomes the basis for any
future gain or loss.

Original   cost                   &n bsp;         &n bsp;         &n bsp; $650,000
Unrealized I/S loss for   20X1       ;        (75,000)
FMV at   12/31/X1     &n bsp;         &n bsp;         &n bsp;          575,000
FMV at   6/30/X2     &nb sp;         &nb sp;         &nb sp;          (530,000)
                                                                      ---------------
Unrealized loss in 2002   I/S     $&nbs p;         &nbs p;  45 ,000

Do u agree with this? It is mentioned in the Becker's book that for any
transfer of a particular security from trading to available for sale, The
unrealized holding gain r loss at the date of transfer is already
recognized in earnings and shall not be reversed. i.e. no adjustment is
necessary. Then why do we need this calculation?

According to me:
The Unrecognized loss for the year 20X2 should be 85000 [as per the
market value as on 31/12/20X1 i.e. 575000 (-) market value as on
31/21/20X2 i.e. 490000]

__________________
" The task ahead of you is never greater than the power behind you."

rumboj
Major Contributor

Joined: 19 Jun 2009
Location: United States
Online Status: Offline
Posts: 329

Posted: 03 Jul 2009 at 01:11 \| IP Logged

I think the issue is that we have to account for those securities as trading securities up until June 30th when they became available for sale securities. Accordingly on June 30th, we would have recorded a realized loss (included in the I/S) of 575,000-530,000=45,000. The remaining loss of 40,000 (530,000-490,000) is an unrealized loss and is included in Comprehensive income.

My problem with this question is that it neglects to realize that comprehensive income can be calculated as an extension of the income statement. If it wanted us to consider them separately, it really should have said "recognized/realized loss" or something like that.

__________________
---South Floridian---
FAR-7/17/09...92
BEC-8/28/09...89
REG-10/19/09..93
AUD-11/30/09..95
CMA--->Done 4/9/10
CIA--->Done 7/15/10
(All Gleim Books and CDs)

kj_nyc
Major Contributor

Joined: 05 Jun 2009
Location: United States
Online Status: Offline
Posts: 1145

Posted: 03 Jul 2009 at 12:55 \| IP Logged

rumboj wrote:

Can be but does not have to be. Remember that there are 3 ways to present comprehensive income (as an extension of the income statement, in a separate statement of comprehensive income, or in the statement of stockholders' equity). When they refer to income statement on the CPA exam, they are referring only to items that figure into the determination of net income, not comprehensive income.

Sorry, you can NOT post a reply.
This topic is closed.

Printable version

You cannot post new topics in this forum
You cannot reply to topics in this forum
You cannot delete your posts in this forum
You cannot edit your posts in this forum
You cannot create polls in this forum
You cannot vote in polls in this forum