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 debt securities with an aggregate fair value in excess of amortized cost includes one particular security whose fair value has declined to less than one-half of its amortized cost. The decline in value is considered to be other than temporary.

Situation II

The portfolio of available-for-sale debt securities includes securities that have an amortized cost in excess of fair value of $500. The remainder of the portfolio has a net fair value in excess of amortized cost of $1,000.

Situation III

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

Situation IV

A company’s portfolio of available-for-sale securities consists of the bonds of one company. At the end of the prior year, the fair value of the security was 95% of amortized cost, and the effect was properly reflected in an allowance account. However, at the end of the current year, the fair value of the debt security had appreciated to 102% of the amortized cost.

Required:

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