Chapter 13, Problem 5C

Available-for-Sale Securities

The following are four unrelated situations involving investments in available-for-sale securities:

Situation I

A portfolio of available-for-sale securities with an aggregate fair value in excess of cost includes one particular security whose fair value has declined to less than one-half of the original cost. The decline in value is considered to be other than temporary.

Situation II

The portfolio of available-for-sale securities includes securities that have a net cost in excess of fair value of $2,000. The remainder of the portfolio has a net fair value in excess of cost of $5,000.

Situation III

An available-for-sale security, whose fair value is currently less than cost, is reclassified as a trading security.

Situation IV

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 the effect was properly reflected in an allowance account. However, at the end of the current year, the fair value of the security had appreciated to twice the original cost.

Required:

Explain the effect on classification, carrying value, and earnings for each of the preceding situations.