Chapter 3 Section 1: Marketable Securities

Question 1

Define and classify trading securities

Answer 1

Bought and held principally for the purpose of selling them in the near term
Current asset

Question 2

Define and classify available-for-sale securities

Answer 2

Securities that don’t meet the definition of trading or held-to-maturity
Can be current or non-current assets

Question 3

Define and classify held-to-maturity securities

Answer 3

Investments where the corporation has the intent and ability to hold them to maturity
Generally non-current assets

Question 4

How do you report trading securities and their gains and losses?

Answer 4

Mark to market

Put unrealized gains and losses on the income statement as part of income from continuing operations

Question 5

How do you report AFS securities and their gains and losses?

Answer 5

Mark to market

Put unrealized gains and losses in OCI (U in PUFER)

Question 6

When are gains and losses realized?

Answer 6

When the security is sold they move to the income statement

Question 7

How are HTM securities reported?

Answer 7

At amortized cost

Question 8

How do you handle reclassification between categories?

Answer 8

1. From trading - do nothing, it’s already in the I/S
2. To trading - recognize unrealized gains and losses immediately
3. HTM to AFS - report unrealized gains and losses in OCI
4. AFS to HTM - amortize unrealized gains and losses that were in OCI to the I/S, like you would a premium or discount

Question 9

How do you handle permanent declines in value?

Answer 9

Write down the cost basis to FV. That is the new cost basis. The write down is a realized loss on the income statement.