Investments

Question 1

How are Available-For-Sale securities recorded on the Balance Sheet?

Answer 1

At Fair value as either Current or Non-current assets.

Question 2

How are Available-For-Sale security Unrealized G/L treated?

Answer 2

Included in OCI (Other Comprehensive Income)

Question 3

How are Unrealized G/L for Available-For-Sale securities that are reclassified to Held-to-Maturity or Trading Securities treated?

Answer 3

HTM - Stockholder’s Equity
/ Trading Securities - Current Period.

Question 4

How are Held-to-Maturity securities recorded on the Balance Sheet?

Answer 4

Amortized cost as Current or Non-current assets.

If reclassified as AFS - Unrealized G/L go to Stockholder’s Equity

If reclassified as Trading Securities - Unrealized G/L recognized in Current Period

Question 5

How are Held-to-Maturity securities Unrealized G/L treated?

Answer 5

Trick question - Unrealized gains or losses are not applicable because they are HTM

Question 6

How are Trading Securities recorded on the Balance Sheet?

Answer 6

At Fair Value as a Current Asset

Unrealized gains/losses are recorded on the Income Statement

If they are reclassified as held-to-maturity or available-for-sale- there is no effect upon transfer.

Question 7

How are Trading Securities Unrealized G/L treated?

Answer 7

Recorded on the Income Statement

If they are reclassified as HTM or AFS - there is no effect upon transfer.

Question 8

What should be the gain on sale of this investment in Lee’s year 2 income statement? how would you calculate?

Answer 8

Under the equity method, the carrying amount of the investment is increased by the investor’s share of investee earnings and decreased by dividends received and decreased by amortization of excess of cost over book value

Question 9

Cash dividends declared out of current earnings are distributed to an investor. How will the investor’s investment account be affected by those dividends under each of the following accounting methods

Answer 9

Under the cost adjusted for fair value method, dividends received from current earnings are to be recognized as income to the investor and will not affect the investment account. Under the equity method, the receipt of dividends reduces the carrying amount of the investment.