[calicpa]

I thought the answer would be D. What would this j/e effect if assets isnt effected? a loss and what else?

On both December 31, 2003 and December 31, 2004, Kopp Co.’s only marketable equity security had the same market value, which was below cost.

Kopp considered the decline in value to be temporary in 2003 but other than temporary in 2004. At the end of both years, the security was classified as a noncurrent available-for-sale investment.

What should be the effects of the determination that the decline was other than temporary on Kopp’s 2004 net noncurrent assets and net income?

A. No effect on both net noncurrent assets and net income.

B. No effect on net noncurrent assets and decrease in net income.

C. Decrease in net noncurrent assets and no effect on net income.

D. Decrease in both net noncurrent assets and net income.

Correct!

A permanent decline in the value of an available-for-sale security is recognized as a loss in the Income Statement (whereas nonpermanent declines are treated as reductions in owners’ equity).

The security did not change in value during 2004 because the market value had not changed, thus there is no further reduction in assets. The owners’ equity account would be reclassified as a loss account; thus, only income is decreased.

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[ZSRizvi]

When the temporary decline was recorded in 2003, it was recorded under a “valuation account.” The J/E would be:

Dr. Unrealized loss on AFS securities

Cr. Valuation allowance (fair value adjustment)

That AFS would be reported net of that valuation allowance on the B/S. So, let's say the AFS was for $100,000 and there was a FV adjustment of $10,000: It would be reported on the B/S as $90,000 (but it's reversible).

Then in 2004, a permanent decline occurred equal to the initial unrealized loss of $10,000. The J/E would be:

Dr. Realized loss on AFS securities

Cr. AFS securities

So, now the original amount of $100,000 is actually written down to $90,000. Which is why there is no change in the noncurrent assets reported because the carrying amounts remain the same. The prior valuation allowance and unrealized loss would be reversed out.

Was that somewhat helpful…?

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

When the temporary decline was recorded in 2003, it was recorded under a “valuation account.” The J/E would be:

Dr. Unrealized loss on AFS securities

Cr. Valuation allowance (fair value adjustment)

That AFS would be reported net of that valuation allowance on the B/S. So, let's say the AFS was for $100,000 and there was a FV adjustment of $10,000: It would be reported on the B/S as $90,000 (but it's reversible).

Then in 2004, a permanent decline occurred equal to the initial unrealized loss of $10,000. The J/E would be:

Dr. Realized loss on AFS securities

Cr. AFS securities

So, now the original amount of $100,000 is actually written down to $90,000. Which is why there is no change in the noncurrent assets reported because the carrying amounts remain the same. The prior valuation allowance and unrealized loss would be reversed out.

Was that somewhat helpful…?

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[calicpa]

yes that made perfect sense. thanks!

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[calicpa]

yes that made perfect sense. thanks!

BEC - 84, 4/6/13
AUD - 77, 5/28/13
REG - 83, 4/12/14
FAR - 83, 10/3/13

Ethics - 90% 4/24/13

150 unit education requirement met!
Work experience met!

[ZSRizvi]

No problem. Glad to help. 🙂

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[ZSRizvi]

No problem. Glad to help. 🙂

BEC (July 2013)
FAR (OCT 2013)
REG (NOV 2013)
AUD (JAN 2014)

The CPA Exam is an opponent that not even the Fellowship of the Ring would want to come across.

I have a long...long...journey ahead of me.

[Author]

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