F5 M1

Question 1

fair value option

Answer 1

-entities can choose fair value option on instruments not typically measured at FV
-unrealized gains and losses reported in earnings
-cannot change out of the fair value option

Question 2

financial assets and liabilities eligible for fair value option

Answer 2

1) debt investment otherwise classified as AFS
2) equity investment

Question 3

financial assets and liabilities NOT eligible for fair value option (IV PLED)

Answer 3

1) investments in subsidiaries
2) VIES required to consolidate
3) pension benefits assets and liabilities
4) leases
5) deposit liabilities of financial institutions
6) equity financial instruments

Question 4

fair value changes in instrument specific credit risk

Answer 4

-part of the change in fair value related to instrument specific credit risk recognized in OCI
-derivative liabilities recognize it in net income
-once liability derecognized, and remaining AOCI gains and losses recognized in earnings

Question 5

when can a fair value option be applied?

Answer 5

1) date entity recognizes an eligible financial instrument
2) investment treated under equity method accounting
3) date entity stops consolidating investment in subsidiary or VIE

Question 6

trading securities

Answer 6

-securities bought and held for purpose of selling it in near term
-generally reported as current assets (sometimes non-current assets)
-gains and losses (realized and unrealized) reported in net income

Question 7

available for sale security

Answer 7

-not an AFS or HTM
-holding a security for an indefinite period of time
-reported current assets or non-current assets
-unrealized gains and losses reported in OCI
-realized gains and losses move to earnings

Question 8

held to maturity

Answer 8

-entity has intent to hold security to maturity
-reported as current or non-current assets
-no gains and losses are reported

Question 9

when can the HTM security classification not be used?

Answer 9

when an entity cannot get nearly all of the money it anticipated from its investment

Question 10

how are trading securities and AFS securities measured at?

Answer 10

fair value

Question 11

what is a HTM security measured at?

Answer 11

amortized cost

Question 12

what is fair value?

Answer 12

the market price of a security a buyer and seller would pay and accept for it

Question 13

unrealized holding gain for trading securities journal entry

Answer 13

Dr. Valuation account
Cr. Unrealized gain on trading securities

Question 14

unrealized holding loss for trading securities journal entry

Answer 14

Dr. Unrealized loss on trading securities
Cr. Valuation account

Question 15

unrealized holding gain for AFS journal entry

Answer 15

Dr. Valuation account
Cr. Unrealized gain on AFS

Question 16

unrealized holding loss for AFS journal entry

Answer 16

Dr. Loss on AFS
Cr. Valuation account

Question 17

realized gains and losses for trading securities and AFS

Answer 17

-occurs when debt security is sold OR AFS security deemed to be impaired
-realized gains and losses recorded in net income

Question 18

are HTM unrealized gains and losses recognized?

Answer 18

No, because they are not marked to market

Question 19

security transferring out of trading category

Answer 19

unrealized gains and losses already recognized in I/S, no adjustment to be made

Question 20

security transferring to trading category

Answer 20

unrealized hold gains and losses recognized in earnings immediately

Question 21

HTM to AFS transfer

Answer 21

unrealized holding gains and losses recorded in OCI

Question 22

AFS to HTM transfer

Answer 22

amortize gains and losses from OCI with any bond premium or discount amortization

Question 23

journal entry to record interest income on trading or AFS security

Answer 23

Dr. Cash
Cr. Interest income

Question 24

credit losses under CECL?

Answer 24

-determined based on past, current and future conditions
-recognized as current expense on I/S and allowance on B/S
-increases and decreases in credit loss changes reflected in I/S

Question 25

impairment for HTM

Answer 25

=the PV of expected cash flows (includes PV of loan and PV of interest payments) - amortized cost -loss reported on net income

Question 26

impairment of AFS

Answer 26

=fair value - amortized cost -credit loss reported on net income -any additional unrealized loss reported in OCI

Question 27

impairment of AFS and there is a loss

Answer 27

1) fair value - amortized cost 2) the PV of expected cash flows - amortized cost = expected credit loss 3) remainder is unrealized holding loss on AFS

Question 28

journal entry for allowance on credit loss if loss is less than expected credit loss calculation

Answer 28

Dr. Credit loss Cr. Allowance for credit losses

Question 29

journal entry for allowance on credit loss if loss is greater than expected credit loss calculation (AFS)

Answer 29

Dr. Credit Loss (PV of expected future cash flows - amortized cost) Dr. Unrealized loss on AFS (total loss - expected credit loss calc) Cr. Allowance for credit losses (PV of expected future cash flows - amortized cost) Cr. Valuation account (total loss - expected credit loss calc)

Question 30

journal entry for sale of trading security

Answer 30

Dr. Cash Cr. Trading security Cr. Realized gain on trading security

Question 31

realized gain or loss on trading security calculation

Answer 31

selling price - adjusted cost Note: adjusted cost (original cost +/- unrealized holding gains or losses previously recognized in net income)

Question 32

journal entry for sale of AFS security

Answer 32

Dr. Cash Dr. Unrealized gain on AFS Cr. AFS Cr. Realized gain on AFS

Question 33

realized gain or loss on AFS calculation

Answer 33

= selling price - original cost of security Note: any unrealized holding gains and losses recorded in AOCI should be reversed at time of sale

Question 34

equity security

Answer 34

-an ownership interest in an enterprise or right to get or dispose of interest in an entity

Question 35

put options

Answer 35

right to dispose of ownership shares

Question 36

equity securities are valued at

Answer 36

fair value through net income

Question 37

practicability exception to FVTNI can be used for:

Answer 37

equity investments that do not have determinable fair value

Question 38

unrealized loss on equity security journal entry

Answer 38

Dr. Unrealized loss on equity security Cr. Valuation account

Question 39

unrealized gain on equity security journal entry

Answer 39

Dr. Valuation account Cr. Unrealized gain on equity security

Question 40

treatment of non-liquidating and liquidating dividends for equity securities

Answer 40

-dividends treated as dividend income if a non-liquidating dividend -liquidating dividends treated as return of capital and reduce investor's basis in investment

Question 41

journal entry for non-liquidating dividend

Answer 41

Dr. Cash Cr. Dividend income

Question 42

journal entry for liquidating dividend

Answer 42

Dr. Cash (dividend * % ownership) Cr. Dividend income (RE * % ownership) Cr. Investment in Investee (plug)

Question 43

equity investment valued if fair value not determinable

Answer 43

= cost - impairment Note: if impairment exists, cost is written down to fair value and write down considered as realized loss in earnings

Question 44

instances where equity investment considered impaired

Answer 44

1) going concern (noncompliance to debt) 2) adverse changes in industry, geography, tech etc. 3) significant decline in earnings, business prospects etc. 4) offers to buy from investee for less than investor's carrying value

Question 45

sale of equity security journal entry (no gain or loss)

Answer 45

Dr. Cash Cr. Equity security

Question 46

sale of equity security with a gain journal entry

Answer 46

Dr. Cash Cr. Gain on equity security Cr. Equity security

Question 47

AFS and HTM items disclosed in notes to F/S

Answer 47

1) aggregate fair value 2) gross unrealized holding gains and losses 3) amortized cost basis by major security type 4) info about contractual maturities of debt securities

Question 48

disclosure for equity securities and calculation

Answer 48

-unrealized holding gains and losses during reporting period Calculation: Net gains and losses recognized during period on equity securities (Net gains and losses recognized during period on equity securities sold)

Question 49

disclosures for entities opted for practicability exception

Answer 49

1) carrying amt of investments without readily determinable FV 2) any impairment charges during period 3) adjustments to carrying value from price changes to reflect FV of security

Question 50

disclosure of concentration credit risks

Answer 50

-risk of loss from failure or another party to meet contract terms -concentration of credit risk occurs when entity has contracts of material value with parties in same industry -disclosures apply to all entities (except nonpublic entities < $100M and no derivatives)

Question 51

market risk disclosure

Answer 51

-risk of loss due to changes in market value -entities not required (encouraged) to disclose quantitative info of market risks of financial instruments