Investments Flashcards
Describe a direct financing lease
A direct financing lease is a capital lease that does not give rise to manufacturer’s or dealer’s profit. It is a capital lease under which the lessor recognizes only interest revenue on the lease receivable; there is no profit margin at inception of the lease because the cost of the leased asset is the same as its selling price.
Rental payments for a direct financing lease are computed based on the lessor’s cost of the leased asset plus interest at the market rate. (FASB ASC 840-10-25-43(b))
Investments
What are the three kinds of debt securities and equity securities?
Trading securities.
If a security is acquired with the intent of selling it within hours or days, the security shall be classified as trading. However, at acquisition an entity is not precluded from classifying as trading a security it plans to hold for a longer period. Classification of a security as trading shall not be precluded simply because the entity does not intend to sell it in the near term.
Available-for-sale securities.
Investments in debt securities and equity securities that have readily determinable fair values not classified as trading securities or as held-to-maturity securities shall be classified as available-for-sale securities.
Held-to-maturity securities.
Investments in debt securities shall be classified as held-to-maturity only if the reporting entity has the positive intent and ability to hold those securities to maturity.
Investments
How is insurance expense in a life insurance policy calculated?
Since the cash surrender value of a life insurance policy is an asset, then the insurance expense is only the premium less the increase in the asset (surrender value).
Example
Cash surrender value (01/01/X6) $ 87,000
Cash surrender value (12/31/X6) 108,000
Annual advance premium paid (01/01/X6) 40,000
Insurance Expense
Annual advance premium payment $40,000
Less increase in cash surrender value
($108,000 - $87,000) 21,000
——-
Life insurance expense for 20X6 $19,000
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Investments
What is the formula for the intrinsic method?
Formula for intrinsic method
Market Price- Exercise Price
Investments
For a transfer of securities, how are the security’s unrealized holding gain or loss accounted for?
At the date of the transfer, the security’s unrealized holding gain or loss shall be accounted for as follows:
For a security TRANSFERRED FROM THE TRADING CATEGORY, the unrealized holding gain or loss at the date of the transfer will have already been recognized in earnings and SHALL NOT BE REVERSED.
For a security transferred INTO THE TRADING CATEGORY, the unrealized holding gain or loss at the date of the transfer shall be recognized in earnings IMMEDIATELY.
Investments
What are the three characteristics of a derivative instrument?
A derivative instrument has three characteristics:
- There is an underlying or notional amount.
- There is little or no initial net investment.
- Its term requires or permits net settlement.
Investments
True or False
The gain or loss in a fair value hedge should be reported in other comprehensive income
False
The gain or loss in a fair value hedge should be recognized in net income in the period in which the change in fair value takes place.
Investments
True or False
The gain or loss in a cash flow hedge should be reported in net income in the period in which the gain/ loss takes place.
False
The gain or loss in a cash flow hedge should be reported in other comprehensive income
Investments
Define intrinsic Value
The intrinsic value is the excess of the market price over the exercise price.
Investments
True or False
When an investment that has been accounted for using another method qualifies for the use of the equity method due to a change in ownership level (such as from 10% to 30%), the change to the equity method should be reported retroactively.
Investments
True
When an investment that has been accounted for using another method qualifies for the use of the equity method due to a CHANGE IN OWNERSHIP LEVEL (such as from 10% to 30%), the change to the equity method should be reported RETROACTIVELY.
