Question

The following information pertains to Lynx Corporation's portfolio of marketable securities for the years ended December 31, Year 1, and December 31, Year 2:

Cost Fair Value Activity Year 2 Fair Value (12/31/year 2)

Held-to-Maturity Debt Securities

Bond A $90,000 $92,000 Received $3,000 $93,500

interest

Available-for-sale Debt securities

Bond B $100,000 $101,750 sold at $103,000   $102,100

Marketable Equity Securities

(Lacks significant impact)

Stock C $75,000 $68,000 $73,000

Stock D $45,000 $51,000 sold at $49,500 $53,500  

Additional Notes (1): Bond A is an 8 - year bond paying 3% annually; face value $100,000, issued at a market yield of 4.5%. It was bought on 1/1/year 1.

Additional Notes (2): Bond B is a 10-year bond paying 3.5% and was purchased at face value ($100,000). It was sold on 1/2/year 2. The interest accrued in year 2 is immaterial.

1.) Compute the carrying value of each security on the company's balance sheet for year 1:  

Bond A:

Bond B:

Stock C:

Stock D:

Answer 1

Bond A - Held to Maturity Debt Securities:

Held to Maturity Debt Securities is shown on the balance sheet at the amortised acquisition cost and all changes to the market has to be ignored. Hence Fair Value has to be ignored.

Bond A to be classified as long term investment as it is 8 year bond

Treatment : The carrying value to be reported for balance sheet year 1 is 93,000

Cost - $90,000

Add:   $3,000 (Accrued Interest)

Accrued income of $3000, has to be booked as Earned Income in Income statement

Bond B - Available for Sale Debt Securities:

Available for Sale Debt Securities are reported at Fair Value and unrealised gains and losses to be shown separately as accumulated other income within the Equity section of balance sheet and not to be get added to fair value.

Bond B to be classified as long term investment.as it is 10 year bond

Hence carrying value to be reported at Balance sheet at year 1 = $101,750

Stock C :

Marketable Equity securities are reported at lower of cost or market value.

Stock C to be classified as current asset as it is high liquid investment

In this Fair Value is less than the cost, hence to be reported at $68,000

Stock D:

In this cost is less than the market value and hence the carrying value reported at balance sheet as $45,000

Stock D to be classified as current asset as it is high liquid investment