Investments in Debt & Equity Securities

Question 1

Marketable Debt Security categories

Answer 1

Trading
AFS
Held to maturity

Question 2

Marketable debt securities trading

Answer 2

Buys and sells within short period. BS is FV and gains/loses are reported in NI

Question 3

Marketable debt securities AFS

Answer 3

Everything that is not trading or held to maturity. B/S reported at FV and gains losses are in OCI

Question 4

Marketable debt securities held-to-maturity

Answer 4

Has ability and intent to hold until due date. B/S reports at amortized cost

Question 5

Treatment of changes in value for AFS debt securities

Answer 5

1. Determine portion due to credit risk and record credit loss or NI
2. Determine market risk and record unrealized gain/loss and OCI
3. Unrealized gain/loss transferred to AOCI and remains there until classified or resold

Question 6

AFS debt securities regular vs FV treatment

Answer 6

AFS gains and losses reported in OCI in regular and current earnings in FV

Question 7

Held-to-maturity debt securities regular vs FV option

Answer 7

Regular reported at amortized cost while FV is reported at FV on BS. No unrealized gain or loss on regular. Unrealized gain/loss in current earning on FV

Question 8

Reclassifications of debt securities

Answer 8

To trading –> Recognized in earnings
From trading –> N/A
AFS to HTM –> OCI, trasferred to AOCI and amortized over remaining life
HTM to AFS –> OCI

Question 9

Treatment of changes in FV for AFS debt securities

Answer 9

Is FV less than amortized cost, if no there is no impairment loss and it is reported in unrealized holding gain in OCI. If yes, does management intend to see before recovery of cost? If yes, write down FV and report in I/S. If no determine credit risk and report in I/S and determine market risk and report in unrealized holding in OCI

Question 10

characteristics of held-to-maturity debt securities

Answer 10

• at start recorded at cost but carried at amortized cost
• difference between face value and carrying is amortized interest income
• FV option may be elected
• creditworthiness evaluated in each period
• Unrealized holding gains/losses are disclosed in F/S notes and not recognized

Question 11

Bond premium amortization

Answer 11

(Bond Face Value * Coupon rate) - (Bond carrying value * effective interest rate)

Question 12

Significant influence over investee characteristics

Answer 12

Participation in procedures/policies
Extent of ownership related to other shareholdings
Representation on the baord
Material intra-entity transactions
Interchange of managerial personnel
Technological dependency

Question 13

Treatment of securities based on ownership of 20% of less

Answer 13

No influence of investee
Accounting method is FV
Dividends reported in earnings I/S

Question 14

Treatment of securities based on ownership of 20% to 50%

Answer 14

Yes influence of investee
Accounting method is Equity
Reduction to investment on B/S

Question 15

Equity method

Answer 15

reports % of investees net income/loss

Question 16

Dividends received do what for an investor in the 20-50% bucket?

Answer 16

reduce investment account on B/S

Question 17

Accounting for assets w/ excess FV

Answer 17

gains are amortized over life of item