FIN ASSET AT FAIR VALUE

9. Reed Insurance Co. began operations on January 1, 2010. The following information pertains to
Reeds December 31, 2010 portfolio of marketable equity securities:
Trading securities Available-for-sale securities
Aggregate cost $360,000 $550,000
Aggregate market value 320,000 450,000
Aggregate lower of cost or market value applied to each
security in the portfolio 304,000 420,000
Reed does not elect the fair value option. If the market declines are judged to be temporary, what
amounts should Reed report as a loss on these securities in its December 31,
2010 income statement?
Trading securities Available-for-sale securities
a. $40,000 $0
b. $0 $100,000
c. $40,000 $100,000
d. $56,000 $130,000

13. Information regarding Shelton Co.s portfolio of available-for-sale securities is as follows:
Aggregate cost as of 12/31/11 $150,000
Unrealized gains as of 12/31/11 14,000
Unrealized losses as of 12/31/11 26,000
Net realized gains during 2011 30,000
Shelton elects to use the fair value option for reporting all available-for-sale securities. At December 31,
2011, what total amount should Shelton report on its income statement?
a. $ 4,000 gain b. $18,000 gain c. $30,000 gain d. $44,000 gain

11. Data regarding Ball Corp.s available-for-sale securities follow:
Cost Market value
December 31, 2009 $150,000 $130,000
December 31, 2010 150,000 160,000
Differences between cost and market values are considered temporary. Ball does not elect the fair
value option to account for available-for-sale securities. The effect on Balls 2010 other comprehensive
income would be
a. $30,000 b. $20,000 c. $10,000 d. $0









Solutions:
9. (a) Unrealized holding gains and losses for trading securities are to be reported in earnings. On the
other hand, this statement also states that unrealized gains or losses on available-for-sale securities
should be excluded from earnings and reported as other comprehensive income. Therefore, only the
$40,000 ($360,000 $320,000) unrealized loss on trading securities is included in income.

11. (a) Unrealized holding gains and losses on available-for-sale securities should be reported as other
comprehensive income. At 12/31/09, available-for-sale securities would have been reported in the
balance sheet at their fair value of $130,000, with a corresponding unrealized loss of $20,000. At
12/31/10, the fair value of these securities is $160,000. Therefore, an unrealized gain of $30,000
($160,000 $130,000) would result in other comprehensive income of $30,000 as accumulated other
comprehensive income.

13. (b) A company may elect the fair value option for reporting available-for-sale securities. If the fair
value option is elected, realized and unrealized gains and losses from available-for-sale securities are
included in earnings of the period. Therefore, the net gain of $18,000 ($14,000 unrealized gains
+$30,000 realized gains $26,000 unrealized losses) is reported on the income statement for the period.