2.x Marketable Securities

Question 1

What are Trading Securities?

Answer 1

Investments in debt or equity instruments acquired by investor to profit from buying and selling within a short period of time

Question 2

What are Available-For-Sale Securities?

Answer 2

Investments in all marketable debt or equity instruments that don’t fit either the trading or held-to-maturity classifications

Question 3

What are Held-To-Maturity Securities? What two qualities must they possess?

Answer 3

BONDS and other DEBT instrument investments in which the investor has the “INTENT” and “ABILITY” to hold until the due date for repayment

Question 4

Trading Securities are classified as what asset type?

Answer 4

Typically a Current Asset, but a non-current asset in rare circumstances

Question 5

Available-For-Sale Securities are classified as what asset type?

Answer 5

Can be classified as current or noncurrent, depending on expected date of sale

Question 6

Held-To-Maturity Securities are classified as what asset type?

Answer 6

Classified as noncurrent, unless maturity is less than one year from balance sheet date

Question 7

Upon purchase, Trading Securities are recorded at what value? What value are they carried at?

Answer 7

Initially recorded at cost; carried at FMV

Question 8

Upon purchase, Available-For-Sale Securities are recorded at what value? What value are they carried at?

Answer 8

Initially recorded at cost; carried at FMV

Question 9

Upon purchase, Held-To-Maturity Securities are recorded at what value? What value are they carried at?

Answer 9

Initially recorded at cost; carried at amortized cost (face net of unamortized discount or premium) as unrealized gains and losses are not applicable

Question 10

Where are unrealized gains and losses on Trading Securities recognized?

Answer 10

Income statement

Question 11

Where are unrealized gains and losses on Available-For-Sale Securities recognized?

Answer 11

Initially in Other Comprehensive Income (on Multiple-step Statement of Earnings & OCI, separte Statement of Comprehensive Income). Ultimately, it reaches the balance sheet as a part of comprehensive income (in stockholders’ equity)

Question 12

Where are unrealized gains and losses on Held-To-Maturity Securities recognized?

Answer 12

Trick question, as they are not applicable!

Question 13

If selling a Held-To-Maturity security prior to the due date of repayment, how much of the principle needs to have been collected in order for it to stay recorded as Held-To-Maturity?

Answer 13

85% of the principle needs to have been collected (otherwise reclassification is necessary)

Question 14

Where are REALIZED gains and losses on ALL marketable securities recognized?

Answer 14

Income statement

Question 15

Where are interest and dividend income on ALL marketable securities recognized?

Answer 15

Income statement

Question 16

The Acquisition and Disposal of Trading Securities affect which section of the statement of cash flows?

Answer 16

Operating cash flows

Question 17

The Acquisition and Disposal of Available-For-Sale Securities affect which section of the statement of cash flows?

Answer 17

Investing cash flows

Question 18

The Acquisition and Disposal of Held-To-Maturity Securities affect which section of the statement of cash flows?

Answer 18

Investing cash flows

Question 19

For Trading and Available-For-Sale Securities, when unrealized gains or losses occur, what is the best practice for the opposing debit/credit?

Answer 19

Have a “market adjustment” valuation allowance account SEPARATE from the booked investment amount. Netting these two provides the FMV of the investment. Could think of it as a contra-asset account (similar to depreciation) when losses occur. *Could also book the changes directly to the investment account instead, but makes tracking discrete investments at initial cost very difficult.

Question 20

Are Trading Securities subject to impairment losses?

Answer 20

No, as they are continually adjusted to FMV

Question 21

When are Available-For-Sale Securities subject to impairment losses?

Answer 21

When the decline in value is considered “other than temporary”

Question 22

Are Held-To-Maturity Securities subject to impairment losses?

Answer 22

Yes, but it’s rare…and the accounting is tricky

Question 23

For Held-To-Maturity Securities, if the entity intends (or is required) to sell the security prior to recovery, how is the nontemporary loss recognized?

Answer 23

By taking the difference between the fair value (amount to be realized) at the balance sheet date and the amortized cost (carrying value)

Question 24

For Held-To-Maturity Securities, if the entity does not expect to sell the security prior to recovery, how is the nontemporary loss recognized? (By what factors?)

Answer 24

The portion of the loss attributable to credit factors is recognized in earnings, while the remainder will be attributable to other comprehensive income.

Question 25

Once written down, can recoveries in value on Available-For-Sale or Held-To-Maturity Securities be recognized?

Answer 25

No, only on date of realization (i.e., when sold)

Question 26

What approach is used if reclassifying between Trading and Available-For-Sale?

Answer 26

Treat the securities as if they are being sold from the portfolio they are leaving and repurchased at the current market price (FMV) into the portfolio they are entering. Price difference is realized on the income statement. **Eliminate any related valuation allowance accounts

Question 27

What approach is used if reclassifying from Held-To-Maturity to Available-For-Sale?

Answer 27

Realize the difference between amortized cost and FMV in OCI.

Question 28

What approach is used if reclassifying from Available-For-Sale to Held-To-Maturity?

Answer 28

Report the unrealized holding gain/loss on the Balance Sheet as a part of OCI and amortize this amount over the security’s remaining life.

Question 29

If the firm elects the Fair Value Option for its Marketable Securities investment(s), how are gains or losses treated?

Answer 29

The revaluations in the Investment are accompanied by gains and losses shown on the Income Statement. Interest income on HTM securities is still treated the same, and carrying value adjustments are treated as gains and losses on the Income Statement.

Question 30

Is the Fair Value Option broadly required for all Marketable Securities the firm/investor holds, or can it be elected on an instrument by instrument basis?

Answer 30

Can be elected on an instrument by instrument basis, but rationale needs to be disclosed.

Question 31

If an investment is made in publicly traded (ala “marketable”) securities (debt or equity), and it isn’t large enough to provide the investor with significant influence, what three classifications can it be?

Answer 31

1) Trading Securities
2) Available-For-Sale
3) Held-To-Maturity

Question 32

Which securities are investments in debt or equity instruments acquired by investors to profit from buying and selling within a short period of time?

Answer 32

Trading Securities

Question 33

Which securities are investments in marketable debt or equity instruments that don’t fit either the trading or held-to-maturity classifications?

Answer 33

Available-For-Sale Securities

Question 34

Which securities are BONDS and other DEBT instrument investments in which the investor has the “INTENT” and “ABILITY” to hold until the due date for repayment?

Answer 34

Held-To-Maturity Securities

Question 35

Which securities are almost always a Current Asset?

Answer 35

Trading Securities

Question 36

Which securities can be classified as current or noncurrent, depending on expected date of sale?

Answer 36

Available-For-Sale Securities

Question 37

Which securities are classified as noncurrent, unless maturity is less than one year from balance sheet date?

Answer 37

Held-To-Maturity Securities

Question 38

Which securities are initially recorded at cost and carried at FMV?

Answer 38

Trading Securities and Available-For-Sale Securities

Question 39

Which securities are initially recorded at cost and carried at amortized cost?

Answer 39

Held-To-Maturity Securities