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Exercise 8-2 A+ rated
$ 10.00

Exercise 8-2:

The following information was extracted from the December 31, 2014, current asset section of the balance sheets of four different companies:

Wearever Fabrics Frames Corp. Pacific Transport Video Magic

Trading securities $800,000 $490,000 $645,000 $210,000

Available-for-sale-securities 130,000 40,000 250,000 85,000

Short-term equity invest. $930,000 $530,000 $895,000 $295,000

There were no transactions in short-term equity securities during 2015, and as of December 31, 2015, the controllers of each company collected the following information:

 

Wearever Fabrics Frames Corp. Pacific Transport Video Magic

Trading securities $820,000 $480,000 $625,000 $220,000

Available-for-sale securities 122,000 52,000 246,000 88,000

Short-term equity invest. $942,000 $532,000 $871,000 $308,000

a. Compute the change in the wealth levels of each of the four companies due to the market value changes in their equity investments.

b. Compute the effect on 2015 reported income for each of the four companies due to the market value changes in their equity investments.

c. Explain why the answers to (a) and (b) are not the same.

d.How would 2015 reported income change for each company if each chose to use the fair market value option for the available-for-sale securities?

 

 
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