Quad Enterprises is considering a new three-year investment in marketable securities. Which of the following statements best describes how this investment should be reported on the company's balance sheet at the end of the first year?

• A. As a current asset at fair value, with unrealized gains or losses recognized in net income.
• B. As a current liability at fair value, with unrealized gains or losses recognized in other comprehensive income.
• C. As a non-current liability at amortized cost, with unrealized gains or losses recognized in net income.
• D. As a non-current asset at historical cost, with no recognition of unrealized gains or losses.

Answer: (A)

Verified step by step guidance

1. Understand the nature of the investment: Marketable securities are typically classified as either current or non-current assets depending on the company's intent to hold them for short-term or long-term purposes. In this case, the investment is described as a three-year investment, which suggests it may be classified as non-current unless the company intends to sell it within a year.
2. Determine the measurement basis: Marketable securities are generally measured at fair value, historical cost, or amortized cost depending on the accounting standards and the classification of the securities (e.g., trading securities, available-for-sale securities, or held-to-maturity securities).
3. Consider the recognition of unrealized gains or losses: Unrealized gains or losses arise when the fair value of the securities changes but the securities have not yet been sold. Depending on the classification, these gains or losses may be recognized in net income or other comprehensive income.
4. Evaluate the classification of the asset: If the securities are intended to be sold within a year, they are classified as current assets. If they are intended to be held for longer than a year, they are classified as non-current assets. The problem specifies reporting at the end of the first year, which suggests the classification should reflect the company's intent at that time.
5. Match the description to the correct accounting treatment: Based on the options provided, analyze which statement aligns with the accounting standards for marketable securities. For example, trading securities are reported as current assets at fair value, with unrealized gains or losses recognized in net income.