Accounting for Available for Sale and Trading Marketable Equity Securities. Firms report both available-for-sale and trading marketable equity securities at fair value at the end of each reporting period. The reporting of any unrealized holding gain or loss depends on the firm’s purpose for investing in securities. Firms that actively buy and sell securities to take advantage of short-term differences or changes in market values classify the securities as trading securities, a current asset on the balance sheet. Firms include unrealized holding gains and losses on trading securities in the calculation of net income each reporting period. Firms classify marketable equity securities that do not qualify as trading securities as securities available for sale, including them as either current or noncurrent assets depending on the expected holding period. Unrealized holding gains or losses on securities available for sale are not included in net income each period; instead, they appear as a component of other comprehensive income, labeled Unrealized Holding Gain or Loss on Securities Available for Sale. The cumulative unrealized holding gain or loss on securities available for sale appears in the shareholders’ equity section of the balance sheet as part of Accumulated Other Comprehensive Income. When a firm sells a trading security, it recognizes the difference between the selling price and the book value (that is, the market value at the end of the most recent accounting period prior to sale) as a gain or loss in measuring net income. When a firm sells a security classified as available for sale, it recognizes the difference between the selling price and the acquisition cost of the security as a realized gain or loss. At the time of sale, the firm must eliminate any amount in the shareholders’ equity account, Accumulated Other Comprehensive Income, for the unrealized holding gain or loss related to that security.
7.11 Equity Method for Minority, Active Investments.
a. Equity income of $35.14 million (.35 x $100.4 million) will be reported by Ace Corporation for 2010.
b. The statement of cash flows for Ace Corporation will report a net reduction in operating cash flows of $26.39 million due to undistributed earnings of the investee. Recall that $35.14 million of equity income is already shown in the operating cash flow section under the indirect method, but dividends received in cash equals