On January 9, 2006, Company X paid $2,000,000 for 100,000 shares of stock in Company S. Originally the company intended on holding the securities for the foreseeable future. As of December 31, the stocks were valued at $2,200,000. In 2006, Company S had earnings per share of $0.90 and paid dividends per share of $0.20. In late December 2006, the company decided to place the securities in their active marketable securities portfolio. What is the impact of this change in status on the value of the assets of Company X? A. $200,000 B. $0 C. $170,000 D. $70,000 What is the impact of this change in status on the income and the stockholders’ equity of Company X? A. Income will rise by $200,000, but stockholders’ equity will not change. B. Stockholders’ equity will rise by $200,000, but income will not change. C. Income and stockholder’s equity will rise by $200,000. D. Income and stockholder’s equity will not change.
- B 2. A
- A 2. C
- A 2. A
B C we’re all over the place and my confidence in fsa is sinking fast!
I picked the same as Ruhi. The correct answers are B and A. Disptra got it right. Correct Answer is B The stocks were classified as debt and equity securities available for sale, but now they will be classified as debt and equity trading securities. However, although it will affect net income, the change in status will not impact the reported value of the assets. According to SFAS 115, securities transferred from available-for-sale to trading securities are transferred at fair market value and unrealized gains or losses would be included in income. The problem I had with this answer is that they originally classified the securities as available for sale. I thought they were held to maturity (historical cost). But, equity cannot be held to maturity so I guess thats why B is the correct answer. Correct answer is A The stocks were classified as debt and equity securities available for sale, but now they will be classified as debt and equity trading securities. The gain would have been reported in the securities valuation account in the equity section and not on the income statement, but now will be reported as income.
- A. Trading securities are held at fair market value on the balance sheet. 2. A . For both of the above assuming “active marketable securities” implies Trading securities and not Available for sale. Hence the 200,000 of unrealized gain will go straight through the income statement and the Investment will be carried on the B/S at 2,200,000 (200,000 higher than original cost) Another thing to think about ( and maybe i’m thinking too much into this)…is clearly the company would choose this because the value of the shares went up…so to boost their earnings, they moved the securites into their “trading” portfolio…so that they could recognize the unreal gains on the stocks…
Niblita, great question. I have a doubt though- $200k is the unrealized gain, but what about the dividend income? $200k of dividend income should also be reflected in the income statement, no?
Niblita75 Wrote: ------------------------------------------------------- > I picked the same as Ruhi. > > The correct answers are B and A. Disptra got it > right. > > Correct Answer is B > > The stocks were classified as debt and equity > securities available for sale, but now they will > be classified as debt and equity trading > securities. However, although it will affect net > income, the change in status will not impact the > reported value of the assets. According to SFAS > 115, securities transferred from > available-for-sale to trading securities are > transferred at fair market value and unrealized > gains or losses would be included in income. > > The problem I had with this answer is that they > originally classified the securities as available > for sale. I thought they were held to maturity > (historical cost). But, equity cannot be held to > maturity so I guess thats why B is the correct > answer. > > Correct answer is A > > The stocks were classified as debt and equity > securities available for sale, but now they will > be classified as debt and equity trading > securities. The gain would have been reported in > the securities valuation account in the equity > section and not on the income statement, but now > will be reported as income. ok …I guess we were both posting at the same time…saw your answer after i wrote my earlier post… shucks…missed the first one…i too assumed the securities would be HTM…but they are shares being held for the forseeeable future…that’s AFS I guess… oh god…please give me the common sense to not make mistakes as such on the final day!!!
ruhi22 Wrote: ------------------------------------------------------- > Niblita, great question. I have a doubt though- > $200k is the unrealized gain, but what about the > dividend income? $200k of dividend income should > also be reflected in the income statement, no? Dividend income is already relfected in the IS under both trading and available for sale. Since the questions askes what the “change in status” would be, we do not need to worry about dividends here.
good question