QUESTION 2 Partially correct Mark 1.00 out of 2.00 Flag question Interpreting Footnote Disclosures for Investments Assume CNA Financial Corporation provides the following footnote to its 2011 10-K report. Valuation of investments CNA classifies its fixed maturity securities and its equity securities as either available-for-sale or trading, and as such, 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 componant of other comprehensive income...nvestment valuations are adjusted and losses may be recognized as Net realized investment 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 Cost or Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Estimated Fair Value December 31, 2011 (in millions) Fixed maturity securities available-for-sale U.S. Treasury and obligations of government agencies Asset-backed: Residential mortgage-backed Commercial mortgage-backed Other asset-backed Total asset-backed States, municipalities and political subdivisions Foreign government Corporate and other bonds Redeemable preferred stock Total fixed maturity securities available-for-sale $122 $ 16 101 40 18 159 142 18 1,603 265 6,090 993 763 7,846 7,889 620 21,025 54 37,571 994 753 8,001 8,157 602 19,492 41 314 410 70 36,421 1,945 795 Total fixed maturity securities trading Equity securities available-for-sale Common stock 90 25 115 Total fixed maturity securities trading Equity securities available-for-sale Common stock Preferred stock Total equity securities available-for-sale Total 115 325 440 90 332 422 $36,849 25 27 1,972 $ 804 $38,017 (a) At what amount does CNA report its investment portfolio on its balance sheet? In your answer identify the portfolio's fair value, cost, and any unrealized gains and losses Reported on balance sheet 38,017 ($ millions) 36,849X (millions) 0 X ($ millions) Fair value Cost Unrealized gains 1,972 ($ millions) (804) X ( millions) Unrealized losses (b) Compute the net unrealized gain or loss on CNA's investment portfolio Use a negative sign with your answer to indicate an unrealized loss. X million How do CNA's balance sheet and income statement reflect any unrealized gains and/or losses on the investment portfolio? OSecurities are reported at historical cost. Gains and losses are recognized upon sale of the securities Securities are reported at fair value. Unrealized gains and losses on AFS securities are recognized currently in net income Securities are reported at fair value. Unrealized gains and losses on AFS securities are recorded in accumulated other comprehensive income. OSecurities are reported at fair value. Only unrealized losses are recognized in net income. Unrealized gains are deferred and recognized upon sale of the securities (b) Compute the net unrealized gain or loss on CNA's investment portfolio. Use a negative sign with your answer to indicate an unrealized loss x million How do CNA's 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 OSecurities are reported at fair value. Unrealized gains and losses on AFS securities are recognized currently in net income. Securities are reported at fair value. Unrealized gains and losses on AFS securities are recorded in accumulated other comprehensive income. Securities are reported at fair value. Only unrealized losses are recognized in net income. Unrealized gains are deferred and recognized upon sale of the securities Mark 1.00 out of 1.00 (c) How do CNA's 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. 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 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 No entry is required as the securities are currently reported at fair value and all unrealized gains and losses are reflected in current income. The fair value changes bypass the income statement. Mark 1.00 out of 1.00