Issues Raised about Investment Securities

You have just started work for Warren Co. as part of the controllers group involved in current financial reporting problems. Jane Henshaw, controller for
Warren, is interested in your accounting background because the company has experienced a series of
financial reporting surprises over the last few years. Recently, the controller has learned from the
companys auditors that there is authoritative literature that may apply to its investment in securities.
She assumes that you are familiar with this pronouncement and asks how the following situations should be reported in the financial statements.
Situation 2: A trading security whose fair value is currently less than cost is transferred to the
available-for-sale category.
What is the effect upon carrying value and earnings for the situation above? Assume that these
situations are unrelated

CA17-2 (Equity Securities) Lexington Co. has the following available-for-sale securities outstanding on
December 31, 2014 (its first year of operations).

During 2015, Summerset Company stock was sold for $9,200, the difference between the $9,200 and the fair value of $8,800 being recorded as a Gain on Sale of Investments. The market price of the stock on December 31, 2015, was Greenspan Corp. stock $19,900; Tinkers Company stock $20,500
(a) What justification is there for valuing available-for-sale securities at fair value and reporting
the unrealized gain or loss as part of stockholders equity?


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