FAR 4 - M1 FINANCIAL INSTRUMENTS

Question 1

Trade debt securities are recorded at

Answer 1

Fair value

Question 2

Bond investments INTENDED to be held until the maturity date are classified as HELD-TO-MATURITY securities and are reported at

Answer 2

Amortized cost (carrying amt; both LT and ST)

Question 3

How do you recognize unrealized gains or losses for AFS securities transferred to trading category

Answer 3

It is recognized in earnings immediately

Unreal gain/loss of AFS sec - comp income
BUT once transferred to trading - the unrealized amts will need to be recognized in earnings

Question 4

Which assets and liab have the FV option?

Entities may choose to measure certain assets and liab at FV

Answer 4

financial assets - debt and equity sec

liab - notes payable

Question 5

Which assets and liab are EXCLUDED from FV option?

Answer 5

Investments in subsidiaries
Pension benefits assets / liab
Leases

Question 6

What causes the decline in bond’s MV

Answer 6

When interest rate increases = less attractive to investors

= decline in MV

Question 7

Using the CECL model (current expected credit losses), how do you record an AFS sec whose FV is less then amortized cost?

Answer 7

AFS sec
FV < amortized cost

AFS sec s/b written down to the lower FV by
crediting a loss and recognizing it in the inc stmt

AFS sec FV = 150
amort cost = 200

AF sec 200
- loss ( 50)
new amort cost =- 150

Question 8

How is unrealized loss in AFS sec in OCI calculated?

Answer 8

FV < present value of expected cash flow

component of OCI

Question 9

How is Realized loss in AFS sec in calculated?

Answer 9

Pres value of CF < Amortized cost

component of NI before tax

Question 10

How to calculate present value, credit loss, unreal loss

in AFS sec

Answer 10

Amort Cost > Present value = credit loss
Amort cost 250000
Pres value 227000
Credit loss 23000

Present value > FV = unrealized loss (OCI)
Pres value 227000
FV 218000
Unreal loss 9000

Credit loss 23000
Allowance for Credit losses 23000

Unrealized loss - AFS 9000
Valuation allowance 9000

****important: IF FV IS HIGHER THAN PRESENT VAUE = UNREAL GAIN

IF THERE IS CREDIT LOSS AND AT THE SAME TIME UNREAL GAIN AND FV IS HIGHER THAN AMORT COST, THEN THE CREDIT LOSS IS NOT RECORDED IN THE INC STMT BEC AFS SEC CAN BE SOLD AT FV ANYTIME W/C WILL RESULT TO REALIZED GAIN

Question 11

CECL - current expected credit loss

Answer 11

Amortized cost > Present value

Question 12

HTM SEC

Answer 12

uses CECL

Question 13

Equity method VS Fair value method

Answer 13

Equity method =investor owns more than 20% but less than 50% of voting shares - has significant influence over the investee

Fair value method =investor owns less than 20% and significant influence over the investee

Recording the acquisition of investment:
Equity method - at cost
Investment in stock xx
Cash
xx
FV method: SAME, then adjust to FV at end of BS date
Investment in stock xx
Unrealized gain xx

Recording Dividend:
Equity method: Cash xx
Investment in stock xx

FV method: Cash xx
Dividend income xx

Recording investment income:
Equity method: Investment in stock xx
Investment income xx