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 beginning of the year, the company’s 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 company’s 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 company’s reported earnings? Will it affect the value of Alridge’s share price? Will it affect the amount of income taxes that a company pays to the Internal Revenue Service?

Answer 1