Situation 1
Trading securities in the current assets section have a fair value that is $4,200 lower than cost.
According to Kieso, Weygandt, and Warfield (2012) , "trade securities should be reported at fair value on the balance sheet " and "changes in fair value (unrealized gains and losses) should be reported in income" (p. 984). The $4200 decrease in carrying value, then, is reported as an unrealized loss on the income statement.
Situation 2
A trading security whose fair value is currently less than cost is transferred to the available-for-sale category.
The transfer of the trade security to the available-for-sale category affects the carrying value because it should be reported at fair value. It affects earnings because it is an unrealized loss and the loss at the time of transfer has to be reported in the income statement.
Situation 3
An available-for-sale security whose fair value is currently less than cost is classified as noncurrent but is to be reclassified as current.
The available-for-sale security should be recorded at fair value and it does not have any effect on earnings.
Situation 4
A company’s portfolio of available-for-sale securities consists of the common stock of one company. At the end of the prior year, the fair value of the security was 50% of original cost, and this reduction in fair value was reported as an other than temporary impairment. However, at the end of the current year the fair value of the security had appreciated to twice the original cost.
According to Kieso, Weygandt, and Warfield (2012), "companies report available-for-sale securities at fair value on the balance sheet, but do not report changes in fair value as part of net income until after selling the security" (pg 980) so the increase in the fair value should be reported as "part of other comprehensive income and as a component of other accumulated comprehensive income (reported in stockholders’ equity) until realized" (pg 987). This would have...