FAR 2E -Investments Flashcards
What is the treatment of stock dividends under the Equity Method?
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
What are the examples of Held-to-Maturity (HTM) debt securities?
Examples include convertible debt and commercial paper.
What should be done when the carrying amount of an investment using the Equity Method falls below zero?
The investor should discontinue the application of the Equity Method. When the investee becomes profitable, the investor first recovers unrecognized losses before resuming EM.
How are prior-year corrections recorded?
Prior-year corrections are recorded in equity, not in the income statement for the year (retroactive application)
What are the three main classifications of debt securities investments?
a) Held-to-maturity (HTM)
b) Trading
c) Available-for-sale (AFS)
What is the Cost Method used for?
The Cost Method is used to record Treasury stock as a contra-equity account.
How are unrealized gains/losses classified for Available-for-Sale (AFS) debt securities?
Unrealized gains/losses for AFS debt securities are recognized in Other Comprehensive Income (OCI), which is added to Accumulated Other Comprehensive Income (AOCI).
What income is included in earnings for Held-to-Maturity securities?
Interest income, amortization of premium/discount, and realized gains/losses.
What is the measurement basis for Held-to-Maturity (HTM) securities?
HTM securities are measured at amortized cost, not fair value.
What is the definition of a security in the context of investments?
A security is a share, participation, or other interest in property/entity of the issuer of an obligation with certain characteristics.
What is included in the definition of Equity Security?
Equity security includes any security that represents ownership interest or gives the right to acquire or dispose of an ownership interest at fixed prices.
What is the classification requirement for Held-to-Maturity (HTM) securities?
HTM securities can only be classified as such if the entity has both the intent and ability to hold them to maturity.
How are Gains/Losses from Equity Securities recognized?
Gains/Losses from equity securities are recognized in Profit & Loss (P&L), while AFS debt securities’ gains/losses are recognized in OCI.
What are Debt Securities exclusions?
Debt securities exclude options, futures, and leases.
How should Accrued Interest included in a bond’s purchase price be handled?
Deduct accrued interest when calculating the bond’s premium/discount
