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Unformatted text preview: Investment securities are classified as “held-to-maturity,” “available-for-sale,” or “trading securities.” Increases and decreases in the market value between the time a debt security is acquired and the day it matures to a prearranged maturity value are ignored for securities classified as “held-to-maturity.” These changes aren’t important if sale before maturity isn’t an alternative, which is the case if an investor has the “positive intent and ability” to hold the securities to maturity. The fair value of an equity security is considered “readily determinable” if its selling price (or bid-and-asked quotation) is currently available on a securities exchange. When its fair value is not readily determinable, an investment is carried and reported at cost. Any dividends received are recognized as investment revenue, and a gain or loss is reported only when actually realized through the sale of the investment. For investments to be held for an unspecified period of time , fair value information is more relevant than for investments to be held to maturity. Changes in fair values are less relevant if the investment is to be held to maturity because sale at that fair value is not an option. The investor receives the same contracted interest payments and principal at maturity, regardless of movements in market values. However, when the investment is of unspecified length, changes in fair values indicate management’s success in deciding when to acquire the investment and when to sell it, as well as the propriety of investing in fixed-rate or variable-rate securities and long-term or short-term securities. The way unrealized holding gains and losses are reported in the financial statements depends on whether the investments are classified as “securities available-for-sale” or as “trading securities.” Securities available-for-sale are reported at fair value, and resulting holding gains and losses are not included in the determination of income for the period. Rather, they are reported as a separate component of shareholders’ equity , as part of Other comprehensive income. Comprehensive income is a more expansive view of the change in shareholders’ equity than traditional net income. It encompasses all changes in equity from nonowner transactions. So, in addition to net income, comprehensive income includes up to four other changes in equity: Net unrealized holding gains (losses) on investments, Net unrecognized loss on pensions, Deferred gains (losses) from derivatives, and Gains (losses) from foreign currency translation. Unrealized holding gains or losses on trading securities are reported in the income statement as if they actually had been realized. Trading Chapter 12 Investments QUESTIONS FOR REVIEW OF KEY TOPICS Question 12-1 Question 12-2 Question 12-3 Question 12-4 Question 12-5 Question 12-6 Answers to Questions (continued) Question 12-7 securities are actively managed in a trading account with the express intent of profiting...
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- Spring '09
- Financial Accounting