Fiduciary had an investment in Portfolio A that had a market value of $7 million accounted for as available for sale. It had originally charged $3 million when Portfolio A was marked-to-market in the equity account on Fiduciary’s balance sheet. Now, it has been determined that $1 million of the $3 million charge has been permanently impaired. Fiduciary should: A) charge an additional $1 million against the income statement while recognizing an additional charge (debit) to the equity section of the balance sheet. B) reclassify $1 million by charging it against the income statement while recognizing an increase (credit) to the equity section of the balance sheet. C) reclassify $1 million by charging it against the income statement while recognizing a decrease (debit) to the equity section of the balance sheet. D) charge an additional $1 million against the equity section of the balance sheet
B
The $1 million needs to be reclassified, so B or C. I would say that equity needs to increase, so B.
Gotta go with the group here and say B You have the 3mm hit to equity, you are taking 1mm out of there and flowoing it though the IS, so equity gets a bump back up.
Your answer: B was correct! When there is an impairment of a previously realized charge that only affected the equity section of the balance sheet, a reclassification charge must be made to transfer the permanent impairment charge to the income statement. This accounting entry is a charge against the income statement with a corresponding credit or increase to the equity section. I thought it was a good refresher question as I probably would have missed it if I didn’t review the reading before taking a quiz. Good job group.
Which reading is this? I need to read this part again. Thanks a lot.
ruhi22 Wrote: ------------------------------------------------------- > Which reading is this? I need to read this part > again. Thanks a lot. SS 5 Reading 21…I reviewed it today. I thought it was easier the first time I went through it…Everything seems a bit harder the closer to exam day (hopefully that will change soon).
I seriously can’t find this in the CFAI text. Where did u find this? I haven’t studied from Schweser.
i cannot find this in ss reading 21 either. but it does make intuitive sense.
ruhi the topic here is intercorporate accounts… i think i share ur love for cfai text with you…but the first time i read intercorporate i made a note to deal it our tru the schweser route…cos the questions in the text are not many…and…the are too ‘serious’ right from scratch… they deviate from the usual beauty of cfai texts on derivatives and quanty which break u in slowly.
grace grace, I don’t see this question being covered by any of the LOSs…and I noticed that Schweser has included lots of problems that are based on the “old” LOSs. This might be one of those…I don’t know. But if it’s not there in the CFAI text, then I’m not going to worry about it.
ruhi22 - I think you’re on to something. Maybe is an old/removed LOS. I was referring to “refresher” as the part about equity section of balance sheet/available for sale securities. I made the leap intuitively to determine the impairment was charged against income, etc. My thoughts may have been flawed. We all know how logical FSA is??? I don’t see an LOS explicitly answering the posted question.
Could somebody explain this??? We are having a permanent 1m loss and we go ahead and increase the Equity, say what??? Please help!!
Originally the equity was decreased (other comprehensive income) for an unrealized loss for avail for sale sec’s (so increase equity when loss is perm). As stated above, we can’t find an LOS that explains the permanent impairment and subsequent reclassification for an avail for sale sec. I think we should move on and away from this question…If I can find the question in Schweser, I will email them (to determine if it is current).
dinesh, you won’t actually increase the equity overall - the loss that originally reduced the equity was unrealised, and so never flowed through the income statement. So all you are doing is taking that unrealised loss, “realising” it, dumping it through the income statement, whereupon it will flow through to the balance sheet as a reduction in retained earnings, once again reducing equity. Whether it will be at the same level will be dependent on tax treatment.
ruhi - I watched the Schweser VCD this morning and it covered the posted question (very briefly) under LOS 22.d and 22.e. I don’t have my CFAI books with me, but I am curious if the topic is addressed. Either way, it seems to be straightforward at this point.
Thanks Chris & planner for getting this cleared for me!