3. Investments in Debt and Equity Securities Flashcards
At what value are trading securities reported on the balance sheet?
Market value as of the balance sheet date
True or false: marketable securities are recognized at fair market value.
True
True or false: securities (stocks, bonds, options, etc.) issued by publicly traded companies are considered marketable securities.
True
True or false: unrecognized gains and losses of trading securities due to changes in fair market value are recognized in other comprehensive income.
False. They are recognized in income.
When an investment in an available-for-sale security is reclassified as held-to-maturity, at what value is it reclassified, and what happens to any unrealized holding gain or loss?
The security is reclassified at its current market value, and any unrealized holding gain or loss is recognized in OCI and amortized as an adjustment to the effective interest rate on the HTM security.
At what value are available-for-sale securities reported on the balance sheet?
Market value as of the balance sheet date
Where in the financial statements are unrealized gains and losses of available-for-sale securities reported (when the fair market option is NOT elected)?
They are reported in OCI and closed into AOCI
When available-for-sale securities are sold, how are realized gains or losses recognized?
The difference between original cost and the sales proceeds are recognized in income, including any previously unrealized gains and losses, which are reclassified from AOCI to income.
Where are changes in the valuation allowance of an available-for-sale security reported?
Such changes are temporary unrealized gains and losses and are therefore reported in OCI.
At what amount should held-to-maturity debt securities be reported on a balance sheet?
Amortized cost–i.e., they are originally recorded at cost, and any discount or premium is amortized as an adjustment to income until maturity.
A $30,000 gain on an available-for-sale security would have what effect on the security’s valuation allowance?
It would reduce the valuation allowance by $30,000 (and increase OCI by $30,000).
When a trading security is reclassified as an available-for-sale security, at what value is the security reclassified, and what happens to any unrealized gain or loss?
The security is reclassified at current market value, and any unrealized gain or loss is recognized in income.
Where in the financial statements are unrealized gains and losses of available-for-sale securities reported when the fair market option is elected?
They are reported in income.
How is a permanent gain or loss on an available-for-sale security reported in the financial statements?
The original cost of the security is increased (or reduced) to fair market value on the balance sheet, and the gain or loss is reported in income–i.e., it is treated as a realized gain or loss.
When a bond is purchased between interest dates, what amount does the buyer pay the seller, and what amount does the buyer record as the carrying value?
The buyer pays the fair market value plus accrued interest from the last interest date to the purchase date. The buyer records the bond at fair market value (without the accrued interest).
