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FIN 3162 Investment Homework Solutions

FIN 3162 Investment Homework Solutions - FIN 3162...

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FIN 3162 Investment Homework Solutions 1. Case I. At the end of last year, the company would have recognized an unrealized holding loss of 30% of say $100 cost = $30 loss and recorded a Securities Fair Value Adjustment (Trading). At the end of the current year, the company would record an unrealized holding gain 20% over cost but at the end last year the FMV of the security was $70 so the amount that would be recognized as a gain 20% * $100 cost= $20 + $30 loss of last year for a total gain of $50. that would be reported in the other revenue and gains section. The adjustment account would now have a debit balance. In other words, the gain is the 120% * $100- FMV of last year which was $70=$50 gain. Case II. When the decline in value is considered to be other than temporary , the loss should be recognized as if it were realized and the loss would be on the IS and earnings will be reduced. The fair value becomes a new cost basis. Case III. The security is transferred at fair value, which is the new cost basis of the security. The Available-for-Sale Securities account is recorded at fair value, and the Unrealized Holding Loss —Income account is debited for the unrealized loss. The Trading Securities
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