F5 - Deck 1 Flashcards
Marketable debt securities are classified as trading at:
- Fair value, with holding gains included in earnings only to the extent of previously recognized holding losses.
-Fair value, with holding gains and losses included in earnings.
-Lower of cost or market, with holding gains and losses included in earnings.
-Lower of cost or market, with holding gains included in earnings only to the extent of previously recognized holding losses.
-Fair value, with holding gains and losses included in earnings.
Trading debt securities are reported at fair value, with holding gains and losses included in earnings.
How to recognize dividend revenue under the fair value method?
Should be recognized to the extent of cumulative earnings, since the acquisition and return of capital beyond that point.
What are the key aspects of the fair value option for financial instruments?
The fair value option is irrevocable, applied to individual financial instruments in their entirety, and not to specific risks or all assets of similar characteristics.
How are unrealized gains and losses on different types of securities treated?
-Available-for-sale debt securities
-Equity and trading debt securities
-Held-to-maturity securities
Unrealized gains and losses on available-for-sale debt securities are treated as other comprehensive income.
For equity and trading debt securities, they are recorded in net income.
Held-to-maturity securities are valued at amortized cost, with no fair value adjustments recorded.
How are trading securities reported on the balance sheet?
Trading securities, such as bond investments held for selling in the near term, are reported at fair value on the balance sheet.
How are unrealized gains and losses on available-for-sale securities recognized?
Unrealized gains and losses on available-for-sale securities are recognized in other comprehensive income (OCI) in the period incurred, shown net of tax either as an individual line item or aggregated with other OCI components.
Where are unrealized gains on available-for-sale (AFS) securities recorded?
Unrealized gains on available-for-sale (AFS) securities are recorded in other comprehensive income (OCI).
How are gains and losses on trading securities and transferred available-for-sale securities treated?
Trading securities reflect all realized and unrealized gains and losses in earnings. When available-for-sale securities are transferred to trading, unrealized gains or losses are recognized in earnings immediately.
How is a loss recorded for a held-to-maturity debt security under the current expected credit losses (CECL) model?
A loss is recorded when the amortized cost exceeds the present value of the principal and interest expected to be collected.
The loss equals the difference between the amortized cost and present value.
How are losses recorded for available-for-sale debt securities?
Losses for available-for-sale debt securities are recorded in OCI when fair value is below the present value of expected cash flows and the present value is below amortized cost.
The loss in OCI is the difference between present value and fair value, while the credit loss on the income statement is the difference between amortized cost and present value.
Where in its financial statements should a company disclose information about its concentration of credit risks?
- The notes to the financial statements.
- Management’s report to shareholders.
- No disclosure is required.
- Supplementary information to the financial statements.
- The notes to the financial statements.
How does a company record additional COGS associated with undervalued beginning inventory and the difference in land value?
The company records additional COGS by debiting investment income and crediting the investment account. The difference in land value does not affect equity in earnings as it is not amortized.
When is the equity method applied, and how does significant influence affect its application?
The equity method is generally applied with 20-50% ownership, but the key factor is significant influence. If the parent company cannot exercise significant influence, the equity method is not used.
When is the equity method appropriate for use?
- The equity method is used when an investor exercises significant influence, typically with 20-50% ownership.
- Ownership of 25% indicates significant influence, while 5% or 15% does not.
- 75% ownership indicates control, requiring consolidated financial statements.
When is the equity method used to account for investments?
The equity method is used when the investor can exercise significant influence over the investee. This typically occurs with 20-50% ownership, but significant influence can warrant its use even with less than 20% ownership.
