Question

You just got hired as a staff accountant at a reputational company. One of your job duties is to prepare memos to help with decision-making, especially when it involves different accounting choices a company could have made. Recently the company is contemplating purchasing bonds as an investment, due to the downturn of stock market. The company does NOT want to hold them until maturity date; it is unsure how long it will hold these bonds. Your supervisor notices that FASB allows two other categories, i.e., available-for-sale (AFS) versus trading securities (TS), to classify these bonds investment in. However, their accounting procedure and impact on financial statement seem to share some similarities and differences. Your supervisor assigns you to explore about this further. In your memo, analyze the similarities and differences between AFS and TS in the following aspects: 1. Accounting procedures during the year and at year-end 2. Financial statement presentation 3. Impact on the company's key ratio such as a. return on equity (net income/total stockholder' equity) b. return on assets (net income/total assets) TTT Arial + 3 (12pt) • T Words:0

Answer 1

1)

Accounting procedure

Available for Sale Securities

  They are reported in the financial statements at a fair value; wherein, the changes in value in a different accounting period go towards the comprehensive income until the securities are sold. However, when these securities are sold, the unrealized profit or loss in the other comprehensive income (OCI) is reversed, and the realized profit or loss goes to the income statement. The realized amount represents the difference between the selling price and purchase price.

Trading Securities

Trading securities are also reported in the financial statement at a fair value, but they are initially recognized in a financial statement at original cost. With the passage of time, the market value of these securities changes, and, by the end of one accounting period, if it is not sold, its fair value is compared with the original purchase cost to calculate any unrealized loss or gain. The fair value of trading security at the end of each accounting period is afterwards compared to the fair value at the end of the next accounting period along with any profit or loss recognized as income or expense during that period.

2) IN FINANCIAL STATEMENT PRESENTATION

Available for Sale

The changes that occurred in the value of AFS are subsequently recognized in an account called unrealized gain or losses in the OCI. This account is basically found in the shareholder’s equity; hence, no amount is recorded in the income statement.

Trading Account

Unlike available-for-sale securities, trading securities are subsequently recognized as operating income in the income statement.