When a marketable security's classification is changed, which of the following apply?
I. The transfer is accounted for at the amortized historical cost of the security.
II. The change in the fair value of the security is reported as part of the income statement.
III. The switch in classification is at management's discretion.
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A. B. C. D.Explanation
When the classification of a marketable security is changed, the assignation of the security to the new account is carried out at the fair market value on the transfer date, with any gain or loss reflected separately on the income statement (in the case of trading and held-to-maturity securities) or as a separate component of shareholder equity (in the case of available-for-sale securities). The classification and reclassification of securities is largely based on management intent. This allows the firm to manipulate current income by timing the reclassifications. Consequently, any financial statement analysis must take into account the effects of such artificial effects on income.