Investments

Question 1

How are trading securities recorded?

Answer 1

On the balance sheet at Fair Value, as current assets

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 2

How are available-for-sale securities recorded?

Answer 2

On the balance sheet, at fair value as either current or non-current assets

Unrealized gains/losses are included in OCI (Other Comprehensive Income)

If reclassified as held-to-maturity, unrealized G/L go to Stockholder’s Equity

If reclassified as trading securities, unrealized G/L recognized in current period

Question 3

How are held-to-maturity securities recorded?

Answer 3

On the balance sheet at amortized cost as current or non-current assets

Unrealized gains or losses are not applicable

If reclassified as available-for-sale, unrealized G/L go to Stockholder’s Equity

If reclassified as trading securities, unrealized G/L recognized in current period

Question 4

How are acquisition costs for investments related to their recorded values?

Answer 4

Marketable debt and equity securities recorded at cost, including direct costs of acquisition

Accrued interest on debt securities NOT included

Question 5

How does year-end valuation affect investment accounts?

Answer 5

HTM securities reported at amortized cost

For trading securities, difference between FV and cost is recorded directly against account

For AFS securities, difference between FV and cost is recorded in Market Adjustment account

Question 6

How are declines in fair value accounted for?

Answer 6

If AFS or HTM securities have non-temporary declines in FV, they gain a new cost basis equal to FV

Realized loss recognized in current earnings of income statement

Subsequent recoveries do not change cost basis, though they do affect Market Adjustment for AFS securities

Question 7

What is the general rule for transfers between categories?

Answer 7

If transferred to a more “marketable” category, then incur changes (e.g. AFS –> trading = recognized unrealized gain/loss immediately)

If transferred to a less “marketable” category, then do not undo changes (e.g. trading –> AFS = do not reverse unrealized gain/loss)

Any transfers between trading and AFS, record security at FV as of transfer date, the difference being a realized gain/loss

Question 8

How are sales recorded for securities?

Answer 8

Realized gain or loss = difference between net proceeds and the cost of the security

• unamortized cost in case of HTM securities
• FV in case of trading securities

Question 9

What are reclassification adjustments?

Answer 9

Adjustments made based on the reclassification of investments

Made to avoid double counting in current earnings gains/losses that were already included in OCI (though unrealized)

Question 10

How are dividends and interest for investments reported in income?

Answer 10

For all three types, they are reported using the interest method to amortize the discount/premium

For short-term investments, the amortization is usually immaterial and thus not recorded

Question 11

Can equity securities be held-to-maturity investments?

Answer 11

No, because only debt can have a maturity date