F4 M1 Financial Instruments

Question 1

If interest rates have increased in bonds, then the bonds’ interest rate would be (more/less) attractive to investors than when the bond was originally issued. This would cause a (rise/decline) in the bonds’ market value.

Answer 1

Less

Decline

Question 2

Journal entry:
Bought a $100,000 bond at a discount of $10,000.
From the purchaser’s point of view

Answer 2

Dr: Investment in bonds $90,000
Cr: Cash $90,000

Question 3

What type of account is investments in debt securities?

Answer 3

An asset, buying a bond

Question 4

What are the three ways to account for investments in debt securities?

Answer 4

Trading security
Available for sale
Held for maturity

Question 5

What type of account is redeemable preferred stock?

Answer 5

Debt security, asset

Question 6

What type of account is commercial paper?

Answer 6

Notes/drafts, asset

Question 7

Accounting for investment interest as Trading Securities: The general rule is that these debt securities are considered (4 things)

Answer 7

Current asset, cash flow from operations, mark it to fair value, all gains and losses are going to the income statement.

Question 8

Accounting for investment interest as Available-for-sale Securities: The general rule is that these debt securities are considered (3 things)

Answer 8

Cash flow from investing, mark it to fair value, the gains and losses are going to the incomes statement, big difference is that if you haven’t sold it the unrealized gain or loss is going to Other Comp income

Question 9

Accounting for investment interest as Held-for-Maturity Securities: The general rule is that these debt securities are considered (2 things).
You have to do what two things to be able to mark it for Held-for-Maturity?

Answer 9

Current or non-current asset depending on the maturity, Cash flow from investing, account for it at amortized cost (not fair market value)
You have to have the intent and ability to hold these securities to maturity.

Question 10

Journal Entry:

Account for changes in fair value of trading securities. Where do they go?

Answer 10

Dr: Unrealized loss on trading securities
Cr: Valuation account (fair value adjustment)
They go to earnings/net income.

Question 11

Journal Entry:

Account for changes in fair value of available for sale securities. Where do they go?

Answer 11

Dr: Unrealized loss on available-for-sale securities
Cr: Valuation account (fair value adjustment)
They go to other comprehensive income

Question 12

Which two types of debt securities can be accounted for at fair value?

Answer 12

Available for sale securities

Trading securities

Question 13

What type of account is the Valuation Account?

Answer 13

Contra-asset

Question 14

Where do realized gains or losses go on a debt security?

Answer 14

Net income

Question 15

Can held-for-maturity securities have an unrealized gain and loss or realized gain and loss?

Answer 15

No, because you don’t mark it to market value, and you’re not supposed to sell it prior to held-to-maturity

Question 16

How do you recognized a permanent impairment of available for sales securities?

Answer 16

Unrealized gain or loss now onto the income statement (not Other comprehensive income in this case)

Question 17

How do you recognized a permanent impairment of held to maturity securities?

Answer 17

Mark the security to fair market value and the loss goes to the income statement

Question 18

How do you recognized a permanent impairment of trading securities?

Answer 18

It’s already on the income statement

Question 19

How do you calculate the realized gain or loss reported when an available for sale security is sold?

Answer 19

Selling price minus the original cost

Question 20

How do you calculate the realized gain or loss reported when a trading security is sold?

Answer 20

Selling price minus carrying value (fair value at last balance sheet)

Question 21

What are your two options in investing equity securities?

Answer 21

Preferred stock and common stock

Question 22

Which method should you use to account for preferred stock?

Answer 22

No significant influence, trading security

Question 23

Which method should you use to account for common stock with no significant influence?

Answer 23

Trading security

Question 24

Which method should you use to account for common stock with significant influence?

Answer 24

Equity

Question 25

Which method should you use to account for common stock with control?

Answer 25

Consolidate

Question 26

Dividend revenue under the fair value through net income method (FVTNI) should be recognized to what extent?

Answer 26

To the extent of cumulative earnings since acquisition and return of capital beyond that point

Question 27

How do you calculate dividend income?

Answer 27

Number of shares x dividend per share

Question 28

How does receipt of a stock dividend affect net income?

Answer 28

It does not, it increases the number of shares held and decreases the cost basis per share

Question 29

How would you classify bonds that you hold for the purpose of selling in the near term?

Answer 29

Trading securities

Question 30

Disclosure of the concentration of credit risk (is/isn’t) required for financial instruments.

Answer 30

Is

Question 31

Disclosure of the market risk (is/isn’t) required for financial instruments.

Answer 31

Isn’t

Question 32

Which of the following must be disclosed for most financial instruments?
Fair value
Carrying value
Both 
Neither

Answer 32

Both

Question 33

Equity securities are generally reported under what method?

Answer 33

Fair value through net income (FVTNI) (basically trading securities)

Question 34

Estimated cash flows are use to calculate the discounted ARO. Upward revisions to undiscounted cash flows are ____ liabilities and you’ll use the _____ rate.

Answer 34

New liabilities
Current discount rate
Cost more

Question 35

Estimated cash flows are used to calculate the discounted ARO. Downward revisions require removal of “____” liabilities and you’ll use the ______ rate.

Answer 35

Old liabilities
Historical discount rate
Cost less