FAR 4 - Marketable Securities

Question 1

Trading Securities (HFT)

Answer 1

B/S: Current Asset, Debt or Equity, Carried as FMV

IS: Unrealized & Realized gains/losses

Cash Flows: Operating Activity

Question 2

Available for Sale (AFS)

Answer 2

BS: Current or Non-Current, Debt/Equity, carried at FMV, Unrealized gain/losses part of OCI

IS: Realized gain/loss, Interes/Div Income

Cash Flows: Investing

Question 3

Held to Maturity (HTM)

Answer 3

BS: Non-current, Debt Only, carried at Amortiazed Cost

IS: Realized gain/loss, interest income

Cash Flows: Investing Activity

Question 4

Fair Falue Option for

Equity Method

Available for Sale

Trading Securities

Held to Maturity

Answer 4

Equity Method - investment would be reported at FV on each balance sheet date, increase/decrease will be recognized as unrealized gains/losses on the income statement & dividends received will be recognized as income

AVS - will be reported at FV on each balance sheet date. Unrealized gain/loss reported on I/S instead of BS (OCI)

Trading Securities - No Effect (already in FV)

Held to Maturity - continued to be accounted for at amortized cost, recognizing interest income under the effective interest method. In addition, carrying value is adjusted to FV on each balance sheet date with the increase/deacrease recognized as a component of income (I/S)

Question 5

Held-to-maturity securities

Trading securities

Available for sale securities

Answer 5

Marketable debt or equity securities that are purchased for the purpose of resale in the near future are classified as trading securities.

Marketable debt securities that the entity has both the ability and the intent to hold until they mature are classified as held-to-maturity.

All other investments in marketable debt and equity securities, such as convertible preferred stock that the entity does not intend to sell in the near future, are recognized as available for sale securities.

Question 6

Reclassification

Trading AVS

Answer 6

Reclassify at FMV (FMV amount is new cost)

Difference between cost & FMV is treated as realized gain/loss on the IS

Eliminate any valuation account if AVS > Trading

Question 7

Reclassification

HTM > AFS

Answer 7

Reclassify at FMV

If HTM to AFS, record in OCI

Question 8

Reclassification

AFS > HTM

Answer 8

Reclassify at FMV

Difference, unrealized gain/loss is reported on the B/S as part of OCI

Amortized over the remaining life of the security

Question 9

How is the Gain or Loss on Sale of AVS calculated?

Answer 9

Unrealized gains and losses on available for sale investments are reported in other comprehensive income, a component of stockholders’ equity, unless they are not considered temporary, in which case they are reported in income.

Realized gains and losses are recognized in net income in the period of sale, in an amount equal to the difference between the selling price and the original cost. Adam sold 8,000 share for $30 per share, or $240,000. The shares had cost $40 per share, or $320,000. As a result, Adam will recognize a loss of $10 per share or $80,000.

FMV of an AVS is the original cost plus the valuation allowance account.

So when the AVS is sold, Credit the AVS at Cost & reverse the allowance account associated with the AVS.

Question 10

“Net Unrealized Gain/Loss”

Answer 10

Cost of AVS less current FMV.

Shows up as a trick question.