FAR 2E -Investments Flashcards

1
Q

What is the treatment of stock dividends under the Equity Method?

A

Stock dividends are not recognized as income but are recorded as a memorandum entry, reducing the unit cost of all stock owned. The carrying value applies to a larger number of shares

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2
Q

What are the examples of Held-to-Maturity (HTM) debt securities?

A

Examples include convertible debt and commercial paper.

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3
Q

What should be done when the carrying amount of an investment using the Equity Method falls below zero?

A

The investor should discontinue the application of the Equity Method. When the investee becomes profitable, the investor first recovers unrecognized losses before resuming EM.

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4
Q

How are prior-year corrections recorded?

A

Prior-year corrections are recorded in equity, not in the income statement for the year (retroactive application)

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5
Q

What are the three main classifications of debt securities investments?

A

a) Held-to-maturity (HTM)
b) Trading
c) Available-for-sale (AFS)

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6
Q

What is the Cost Method used for?

A

The Cost Method is used to record Treasury stock as a contra-equity account.

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7
Q

How are unrealized gains/losses classified for Available-for-Sale (AFS) debt securities?

A

Unrealized gains/losses for AFS debt securities are recognized in Other Comprehensive Income (OCI), which is added to Accumulated Other Comprehensive Income (AOCI).

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8
Q

What income is included in earnings for Held-to-Maturity securities?

A

Interest income, amortization of premium/discount, and realized gains/losses.

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9
Q

What is the measurement basis for Held-to-Maturity (HTM) securities?

A

HTM securities are measured at amortized cost, not fair value.

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10
Q

What is the definition of a security in the context of investments?

A

A security is a share, participation, or other interest in property/entity of the issuer of an obligation with certain characteristics.

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11
Q

What is included in the definition of Equity Security?

A

Equity security includes any security that represents ownership interest or gives the right to acquire or dispose of an ownership interest at fixed prices.

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12
Q

What is the classification requirement for Held-to-Maturity (HTM) securities?

A

HTM securities can only be classified as such if the entity has both the intent and ability to hold them to maturity.

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13
Q

How are Gains/Losses from Equity Securities recognized?

A

Gains/Losses from equity securities are recognized in Profit & Loss (P&L), while AFS debt securities’ gains/losses are recognized in OCI.

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14
Q

What are Debt Securities exclusions?

A

Debt securities exclude options, futures, and leases.

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15
Q

How should Accrued Interest included in a bond’s purchase price be handled?

A

Deduct accrued interest when calculating the bond’s premium/discount

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16
Q

What is the accounting treatment of Treasury stock?

A

Treasury stock is recorded using the Cost Method as a contra-equity account