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ACCT-UB 3 - Financial Statement Analysis Module 5 Homework

This document contains a homework assignment for a financial statement analysis module. It includes two questions asking students to: 1) Show how various investments would be reported on a company's balance sheet and where unrealized gains/losses would be recorded. 2) Describe how information provided about different marketable equity securities cases would affect classification, carrying value, and income reporting. Students are instructed to submit their answers in a Word or Excel file with their name and module number. Group submissions are allowed with up to 4 students and must specify group members.

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416 views2 pages

ACCT-UB 3 - Financial Statement Analysis Module 5 Homework

This document contains a homework assignment for a financial statement analysis module. It includes two questions asking students to: 1) Show how various investments would be reported on a company's balance sheet and where unrealized gains/losses would be recorded. 2) Describe how information provided about different marketable equity securities cases would affect classification, carrying value, and income reporting. Students are instructed to submit their answers in a Word or Excel file with their name and module number. Group submissions are allowed with up to 4 students and must specify group members.

Uploaded by

pratheek
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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ACCT-UB 3 - Financial Statement Analysis

Module 5 Homework

You will have a single opportunity to submit a single file (please submit a word or excel formatted file) with your
answers. Re-submissions will not be permitted. Feel free to type in your answers after each question below and submit
this same file. Before submitting your file make sure it is titled: [your last name] Mod X HW (substitute the “X” for the
appropriate module number).

If you complete the homework in a group (maximum 4 students per group), each student must submit the same file and
at the top of the file you should specify that it is a group solution, giving the names of all students in the group.

Please provide all answers to the following questions:

Q1. Munger.Com began operations on January 1, 2006. The company reports the following information about its
investments at December 31, 2006:

Required:

a. Show how each of these investments are reported on the Munger.Com balance sheet.

Ans: - The investments held to maturity are shown under long term or non-current assets, as Munger.com
probably intends to hold them for a period greater than a year or a single operating cycle. The other
investments, such as the bonds in Bryan Co. and Caltran Inc. along with the investments in marketable equity
securities (available-for-sale as well as trading), will be marked in current assets as they are held with the
intent of being converted into cash quickly.

b. For assets that are marked to market, indicate where the unrealized value fluctuation is reported (in net income
and/or in comprehensive income).

Ans: - The unrealized losses on the Able Corp. bonds ($40,000) as well as the unrealized losses on Caltran Inc.
($35,000) as well as the trading in securities ($550,000) and would be marked as marked-to-market losses and
reported in the comprehensive income.

Q2. Cited here are four unrelated cases involving marketable equity securities:

1. A noncurrent portfolio of available-for-sale equity securities with an aggregate market value in excess of cost;

1
includes one particular security whose market value has declined to less than one-half of the original cost.
2. The balance sheet of a company does not classify assets and liabilities as current and noncurrent. Th e port- folio
of available-for-sale equity securities includes securities normally considered current that have a net cost in
excess of market value of $2,000. The remainder of the portfolio has a net market value in excess of cost of
$5,000.
3. An available-for-sale marketable equity security, whose market value is currently less than cost, is classified as
noncurrent but is to be reclassified as current.
4. A company’s noncurrent portfolio of marketable equity securities consists of the common stock of one
company. At the end of the prior year, the market value of the security was 50% of original cost, and this effect
was properly reflected in a Valuation Adjustment account. However, at the end of the current year, the market
value of the security had appreciated to twice the original cost. The security is still considered noncurrent at
year-end.

Required:

For each of the cases, describe how the information provided affects the classification, carrying value, and income
reported for that company’s investment securities.

Ans: -

Case 1: - There is no write down of the individual security whose market value declined to less than one half of
its cost because the aggregate market value of the portfolio exceeds the cost of the portfolio. SE will increase to
the extent that the excess of the market over cost will increase over the period. No income statement effect.

Case 2: - This is similar to case 1 except that the firm in question doesn’t use the classified balance sheet format.
In such a case, the analyst must review note disclosures regarding investment classification.

Case 3: - This isn’t a reclassification between categories as the securities remain in the available-for-sale
category. However, analysts should note that the management is contemplating a sale in the near future.

Case 4: - The increase in the fair value of the security should be credited to SE, as it has been classified as
noncurrent and therefore can’t be a trading security.

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