FAR: Comparison and Transfers of Investments (Debt & Equity): 3/29/2018 Flashcards
Cook Company had the following debt investment portfolio of stocks that were purchased during Year 2.
Bonds Classification Cost Fair Value 12-31-Y2
Company R Available-for-sale $30,000 $32,000
Company S Trading $42,000 $46,000
Company T Available-for-sale $15,000 $18,000
Cook elects to use the fair value option for reporting all of its financial assets. What is the unrealized gain recognized on the income statement in Year 2?
1) $0
2) $4,000
3) $5,000
4) $9,000
$9,000
Cook elects to use the fair value option. Cook will value both its trading securities and available-for-sale securities at fair value and record the unrealized gains in earnings for the period. The gain is equal to $96,000 ($32,000 + $46,000 + $18,000) minus $87,000 ($30,000 + $42,000 + $15,000), or $9,000.
On December 31, Year 1, Ott Co. had investments in marketable debt securities as follows:
Cost Market value Mann Co. $10,000 $ 8,000 Kemo, Inc. 9,000 10,000 Fenn Corp. 11,000 9,000 $30,000 $27,000 The Mann investment is classified as held-to-maturity, while the remaining securities are classified as available-for-sale. Ott does not elect the fair value option for reporting financial assets. Ott's December 31, Year 1, balance sheet should report total marketable debt securities as
1) $26,000.
2) $28,000
3) $29,000
4) $30,000
$29,000
ASC Topic 320 requires that held-to-maturity securities be carried at amortized cost and that available-for-sale and trading securities be carried at fair value (FV). Therefore, Ott’s investment portfolio is reported at 12/31/Y1 at the following amounts:
Bond Amount reported
Mann Co. $10,000 cost
Kemo, Inc. 10,000 FV
Fenn Corp. 9,000 FV
total: $29,000
Sun Corp. had investments in marketable debt securities costing $650,000 that were classified as available-for-sale. On June 30, Year 2, Sun decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments’ fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. Sun does not elect the fair value option to account for these investments. What amount of loss from investments should Sun report in its Year 2 income statement?
1) $ 45,000
2) $ 85,000
3) $120,000
4) $0
$0
The requirement is to determine the amount of loss on investments to be reported in Sun’s Year 2 income statement. This transfer is accounted for at fair value, and any holding gains or losses on securities that are transferred to held-to-maturity from available-for-sale are reported as accumulated other comprehensive income. This amount is then amortized over the remaining life of the security as an adjustment to yield. Since cost is greater than fair value by $75,000 at 12/31/Y1 ($650,000 cost − $575,000 fair value), the following entry would be recorded:
Unrealized loss 75,000
Marketable debt securities 75,000
Then on June 30, Year 2, when Sun decides to hold the investments to maturity, an additional $45,000 will be recorded in the valuation account ($575,000 value on books − $530,000 FV) to reflect the change in FV. The following entry would be recorded:
Unrealized loss 45,000
Marketable debt securities 45,000
Each year the unrealized loss would be reported as other comprehensive income that would be closed to accumulated other comprehensive income.
ill Corp. had investments in marketable debt securities purchased on January 1, Year 1, for $650,000 that were classified as trading securities. On June 30, Year 2, Jill decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments’ fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2.
Jill elects the fair value option for reporting these held-to-maturity securities. What amount of loss from investments should Jill report in its Year 2 income statement?
1) $ 40,000
2) $ 85,000
3) $160,000
4) $0
$85,000
The loss in Year 2 is ($575,000 − $490,000).
