Question
Accounting for Short-term Investments (Debt Securities). The Alridge Corp. invests excess cash in debt securities until such funds are needed to support operations. At the
Accounting for Short-term Investments (Debt Securities).
The Alridge Corp. invests excess cash in debt securities until such funds are needed to support operations. At the beginning of the year, the companys portfolio consisted of the following debt securities:
Company | Cost-Basis |
B-M Squibb (BMS) | $ 95,000 |
J & J (JNJ) | 65,000 |
Pacific, Inc. (PFE) | 120,000 |
Total | $ 280,000 |
At year-end, the fair values of the three securities were as follows: BMS, $93,000; JNJ, $73,000; and PFE,
$110,000.
Required:
(a) Calculate the income statement effect of the companys debt securities assuming: (a) all securities are classified as trading; (b) all securities are classified as available-for-sale; and (c) BMS and JNJ are classified as trading, while PFE is classified as available-for-sale.
(b) Does the classification of a debt security as trading versus available-for-sale affect a companys reported earnings? Will it affect the value of Alridges share price? Will it affect the amount of income taxes that a company pays to the Internal Revenue Service?
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