Question

When an investment in an available-for-sale security is transferred to trading because the company anticipates selling the stock in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be?

1) its original cost.
2) its fair value at the date of the transfer.
3) the higher of its original cost or its fair value at the date of the transfer.
4) the lower of its original cost or its fair value at the date of the transfer.

Answer 1

The carrying value assigned to an available-for-sale security transferred to a trading portfolio should be its fair value at the date of the transfer according to fair value accounting principles.

Step-by-step explanation:

When an investment in an available-for-sale security is transferred to a trading portfolio because the company anticipates selling the stock in the near future, the correct carrying value assigned to the investment should be its fair value at the date of the transfer. This is in line with the fair value accounting principles, where securities must be reported at their current market value. The original cost is not used, nor is there a comparison between the cost and fair value to choose the higher or lower. The emphasis is on reflecting the current market value of the security in the trading portfolio.