[KNVB]

Edit: security A is actually held to maturity and should be valued at BV. How do I delete this thread?

Becker Question –

Cost Plus Inc.’s portfolio of marketable securities was as follows (all securities were purchased in the current year):

Securities

A
Purchase
One 10-year bond
$1,500
(face value $1,000)

Year End FMV
$1,400
(carrying value $1,450)
B
100 shares common stock
$30 per share (CV/BV/Purcahsed price)
$28 per share (FV)
C
50 shares preferred stock
$100 per share (CV/BV/Purcahsed price)
$105 per share (FV)

The answer I got was $9,450 because I thought all avail for sale and trading securities are valued at FV. However, here is the solution explanation: Choice “a” is correct. The A bond is a held-to-maturity investment reported at its carrying value of $1,450. Fifty shares of the B stock would be classified as trading securities since they will be sold next year. The other fifty shares would be classified as available-for-sale securities, since management is unsure of their ultimate disposition. Both trading and available-for-sale securities are reported at fair value; therefore, all of the B stock is carried at $28 per share, for a total of $2,800 ($1,400 in each classification). The C stock is also classified as an available-for-sale investment carried at fair value [50 shares x $105/share] = $5,250. Thus, the total of all investment securities on Cost Plus’ balance sheet is $1,450 + $2,800 + $5,250 = $9,500.

WTF. Why would they value Security A at at $1450 which is the CV or BV and not the FV which is $1400. Makes no sense to me

FAR - Studying
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[brainfried75]

Held to Maturity securities are presented at cost not the fair value. In contrast, available for sale and trading securities are valued at fair market value. Just the rules of GAAP. It's pretty easy to remember compared to a formula if you ask me.

[Author]

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