FAR: Debt Investments at Amortized Cost: 3/28/2018 Flashcards
Zinc Company does not elect to use the fair value option for reporting financial assets. An unrealized gain, net of tax, on Zinc’s held-to-maturity portfolio of marketable debt securities should be reflected in the current financial statements as
1) An extraordinary item shown as a direct increase to retained earnings.
2) A current gain resulting from holding marketable debt securities.
3) A footnote or parenthetical disclosure only.
4) A valuation allowance and included in the equity section of the statement of financial position.
A footnote or parenthetical disclosure only.
A valuation allowance is not used for unrealized gains on a held-to-maturity portfolio. An unrealized gain on held-to-maturity securities is disclosed only in the notes to the financial statements. Gains are reflected in the financial statements only when they are realized (i.e., upon sale or for other than temporary declines in value). The year-end financial statements would present the held-to-maturity portfolio at cost. Parenthetical or footnote disclosure would indicate their market value.
An issuer of bonds uses a sinking fund for the retirement of the bonds. Cash was transferred to the sinking fund and subsequently used to purchase investments. The sinking fund
Increases by revenue earned on the investments.
Is not affected by revenue earned on the investments.
Decreases when the investments are purchased.
1) I only
2) I and III
3) II and III
4) III only
Increases by revenue earned on the investments.
Correct! This answer is correct, only I is true. Businesses occasionally accumulate a fund of cash and/or investments for a specific purpose, such as the retirement of bonds in this problem. These funds are referred to as “sinking funds.” The sinking fund is increased when periodic additions are made to the fund and when revenue is earned on the investments held in the fund. When cash is used to purchase investments, the components of the fund change (i.e., cash is invested and replaced by bonds or other securities), but the total fund balance is not affected.
