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Hey Chegg, I need help with this question. For questions b and c, my professor wants me to (1) give reasons for my choice and

Hey Chegg, I need help with this question. For questions b and c, my professor wants me to (1) give reasons for my choice and (2) give reasons why other choices are not appropriate. If you can help me with these questions, and explain in detail what my professor wants for question b and c, it would help me a lot. Thanks a lot.

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Interpreting Footnote Disclosures for Investments CNA Financial Corporation provides the following footnote to its 2012 10-K report.

Valuation of investments The company classifies its fixed maturity securities and its equity securities as either available-for-sale or trading, and as which, they are carried at fair value. Changes in fair value of trading securities are reported within Net investment income on the Consolidated Statements of Operations. Changes in fair value related to available-for-sale securities are reported as a component of Other comprehensive income. . . . Losses may be recognized within Net realized investment gains (losses) on the Consolidated Statements of Operations when a decline in value is determined by the Company to be other-than-temporary.

The following table provides a summary of fixed maturity and equity securities.

Summary of Fixed Maturity and Equity Securities

December 31, 2012 (in millions)

Cost or Amortized Cost

Gross Unrealized Gains

Gross Unrealized Losses

Estimated Fair Value

Unrealized OTTI Losses (Gains)

Fixed maturity securities available-for-sale

Corporate and other bonds

$ 19,530

$ 2,698

$ 21

$ 22,207

$ --

States, municipalities and political subdivisions

9,372

1,455

44

10,783

--

Asset-backed:

Residential mortgage-backed

5,745

246

71

5,920

(28)

Commercial mortgage-backed

1,692

147

17

1,822

(3)

Other asset-backed

929

23

--

952

--

Total asset-backed

8,366

416

88

8,694

(31)

U.S. Treasury and obligations of government sponsored enterprises

172

11

1

182

--

Foreign government

588

25

--

613

--

Redeemable preferred stock

113

13

1

125

--

Total fixed maturity securities available-for-sale

38,141

4,618

155

42,604

(31)

Total fixed maturity securities trading

29

--

--

29

Equity securities available-for-sale

Common stock

38

14

--

52

Preferred stock

190

7

--

197

Total equity securities available-for-sale

228

21

--

249

Total

$ 38,398

$ 4,639

$ 155

$ 42,882

(a) At what amount does CNA report its investment portfolio on its balance sheet? In your answer identify the portfolios fair value, cost, and any unrealized gains and losses.

Reported on balance sheet

=Answer($ millions)

Fair value

Answer($ millions)

Cost

Answer($ millions)

Unrealized gains

Answer($ millions)

Unrealized losses

Answer($ millions)

In respect of questions that follow (1) give reasons for your choice (2) Give reasons why other choices are not appropriate

(b) How do CNAs balance sheet and income statement reflect any unrealized gains and/or losses on the investment portfolio?

Securities are reported at historical cost. Gains and losses are recognized upon sale of the securities.

Securities are reported at market value. Unrealized gains and losses are recognized currently in net income.

Securities are reported at market value. Unrealized gains and losses on AFS (Trading) securities are recorded in accumulated other comprehensive income (net income).

Securities are reported at market value. Only unrealized losses are recognized in net income. Unrealized gains are deferred and recognized upon sale of the securities.

(c) How do CNAs balance sheet and income statement reflect gains and losses realized from the sale of available-for-sale securities?

Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in the AOCI account to reflect the elimination of previously recorded unrealized gains and losses.

No entry is required as the securities are currently reported at market value and all unrealized gains and losses are reflected in current income. The market value changes bypass the income statement.

Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in cash and cash equivalents to reflect the elimination of previously recorded unrealized gains and losses.

Gains and losses realized from the sale of securities are recognized in current income. The company records an accounting (reclassification) adjustment in retained earnings to reflect the elimination of previously recorded unrealized gains and losses.

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