A company reported an unrealized gain in its most recent income statement related to debt securities that are designated at fair value (held-for-trading).
(Question)
A company reclassifies debt securities as available-for-sale. Ignoring any effect on income taxes, which of the following best describes the effects of the necessary adustments?
A. Net income is lower and asset turnover is higher.
B. Return on assets is lower and debt-to-equity is lower.
C. Return on equity is lower and debt-to-total capital is not affected.
| Accounting | U.S.GAAP | |
| Held-for-trading → Available-for-sale | ||
| Reported in | Net income → Comprehensive income as part of shareholders' equity | |
| Net income (NI) | ↓ | |
| Total Equity | → | |
| Total Assets | → | |
| Total Liabilities | → | |
| ROA = NI/Total Assets | ↓/→ = ↓ | |
| ROE = NI/Total Equity | ↓/→ = ↓ | |
| Asset turnover = Revenue/Total Assets | →/→ = → | |
| Debt to Equity | →/→ = → | |
| Debt to Total Capital | →/→ = → |
Answer: C
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