Investments Flashcards
HTM securities are carried at an amortized cost and thus are not adjusted for ______________
Changes in market value (unlike AFS) (Do not mark to FMV, it will be a distractor information in the exam. Therefore, no unrealized gain or loss)
Convertible preferred stock is an equity security that is nonvoting. As it is nonvoting, it does not provide the holder the ability to exercise significant influence. Since the preferred stock is traded in an active market, it would be reported at ____________
Fair Value
Common stock is bought, which results in ownership of 10% of the shares outstanding and gives significant influence over the operating and financial activities of the investee.
Equity Method due to significant influence even if the level of stock ownership is 10%.
Stocks cannot be classified as held-to-maturity because they have no maturity date.
True
The temporary unrealized gain or loss from HTM securities must be reported in income for the current period.
True
If a security is transferred from AFS to trading securities classification, unrealized holding gains and losses are recognized immediately in the income statement.
True, Unrealized gains or losses are recognized when transferred.
Stock dividends require a memo entry to show receipt of additional shares of stock.
The company then recomputes the cost per share based upon the new number of shares.
Bond issue costs are treated as a reduction in bond proceeds and net bond liability and are amortized over the bond term to interest expense.
True
Losses shall be recognized in the period of extinguishment.
True
Unrealized holding gains and losses due to market risk if Fair Value Option is elected.
Recognized in net income
The difference between the cost of the investment and the carrying value of the net assets is known as the DIFFERENTIAL, which is periodically __________ to REDUCE the INVESTMENT ACCOUNT in the investee company.
AMORTIZED
Factors to consider regarding an investor’s significant influence over an investee (PERMIT)
- Participation in policy making processes
- Extent of ownership in relation to the concentration of other shareholding
- Representation on the board of directors
- Material intra-entity transactions
- Interchange of managerial personnel
- Technological dependency
True. Hiring is not included
Only cash dividends with no significant influence are included and not the stock dividend
The ones with significant influence will be adjusted in the equity on the BS. Dividends are adjusted only for BS reporting and only Income from Inv is reported on IS (and not dividends)
Preferred stock or Debt
No Voting Rights, no significant influence
Preferred Equity
Equity - No maturity date
Trading security
FV though PL or FVPL (All gains and losses, interest, dividends - go to Income Statement (IS)
AFS
FV through OCI (unrealized gains going to OCI and not to IS)
HTM or DEBT only
Amortized Cost (do not mark to FMV)
No significant influence
- Trading security
- AFS
- HTM
Only publicly traded can be marked to FMV. Whether the fair value is readily determinable.
If it’s not publicly traded - General Rule - You cannot mark to FMV
Do Common stock, Preferred stock, Stock warrants and call/put options have maturity?
No, No maturity
Debt Securities - Redeemable preferred stock (treat as debt) - Bonds, notes, convertible bonds, redeemable preferred stock (only type of preferred stock that falls under Debt, rest all are part of equity) is ______________
MATURE or have maturity
Equity Securities (Common stock, preferred stock, stock warrants, call/Put options)
We do not mark to market
Consolidation
We do not mark to market
Realization
Income Statement
The FV is reported on each balance sheet date and unrealized gains and losses are reported in income.
No impairment losses on trading securities
True
AFS
Always cash flow from Investing activities