FAR: Debt Investments at Fair Value: 3/26/2018 Flashcards
On January 1 of the current year, Barton Co. paid $900,000 to purchase two-year, 8%, $1,000,000 face value bonds that were issued by another publicly traded corporation. Barton plans to sell the bonds in the first quarter of the following year. The fair value of the bonds at the end of the current year was $1,020,000. At what amount should Barton report the bonds in its balance sheet at the end of the current year?
1) $900,000
2) $950,000
3) $1,000,000
4) $1,020,000
$1,020,000
Incorrect ($1,000,000). This amount is the face value of the bonds. In no case would this be the correct answer unless the bonds were issued at face value (these were purchased at a discount) and the bonds were held-to-maturity, or if the fair value of the bonds was $1,000,000 and the investor was using the fair value method
On December 29, 2017, BJ Co. sold a debt security investment that had been purchased on January 4, 2016. BJ owned no other securities. An unrealized loss was reported in the 2016 Income Statement. A realized gain was reported in the 2017 Income Statement.
Was the debt security classified as available-for-sale (AFS), and did its 2016 market price decline exceed its 2017 market price recovery?
AFS 2016 market price decline exceeded 2017 market price recovery A. Yes Yes B. Yes No C. No Yes D. No No
1) Row A
2) Row B
3) Row C
4) Row D
Row D
Incorrect for available-for-sale classification. The security cannot be classified as available-for-sale because the unrealized gains and losses are recognized in the Income Statement. Unrealized gains and losses on available-for-sale securities are recognized in owners’ equity, not earnings.
Cook Company had the following investment portfolio of debt securities that were purchased during Year 2.
Stock 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 the investment in Company R. Which of the following statements is true?
1) Cook will report an unrealized gain on securities for $6,000 on the Year 2 income statement.
2) Cook may not elect the fair value method for the investment in Company R unless it also uses the fair value method for investments in Companies S and T.
3) Cook will report an unrealized gain in other comprehensive income for $5,000 in Year 2.
4) Cook will report an unrealized gain on securities for $9,000 on the Year 2 income statement.
Cook will report an unrealized gain on securities for $6,000 on the Year 2 income statement.
A company may elect the fair value option on an instrument-by-instrument basis. Therefore, Cook may record its investment in Company R at fair value and include the unrealized gain or loss in earnings for the period and may record its investment in Company T as an available-for-sale security.
