M1 - Financial Instruments Flashcards
If interest rates have increased, then a bonds’ interest rate would be more or less attractive?
Less attractive to investors than when the bonds were originally issued. This would most likely cause a decline in the bonds’ market value.
If a bond investment is classified as held-to-maturity, the investment will be reported at fair value or amortized cost?
amortized cost (or carrying amount)
Unless there is a permanent decline in market value
Trading debt securities and available-for-sale debt securities are reported at their fair value or amortized cost?
fair value
The portion of dividend revenue that should be reported in the investor’s income statement for this year would be the portion of the dividends received this year that (were or were not?) in excess of the investor’s share of investee’s undistributed earnings since the date of investment?
were not,
Rule: Dividend revenue, under the fair value method, should be recognized to the extent of cumulative earnings since acquisition and return of capital beyond that point.
Are discounts amortized on short-term investments?
No
Any unrealized gain or loss on an available for sale debt security would be reported where?
other comprehensive income
Is receipt of a stock dividend considered income?
No, it just increases the number of shares held and decreases the cost basis per share
An impairment of an available for sale debt security that has a decline in FV of a debt investment below the amortized cost and is deemed other than temporary, this must be recorded on what?
A) Other Comprehensive income section of the income statement only
B) Earnings Section of the income statement and writing down the cost basis to FV
B- When an available for sale debt security is determined to be impaired because of an other than temporary decline in fair value below cost, the asset must be written down to the lower fair value by recording a loss that is recognized on the income statement.
Disclosures about the following kinds of risk are required for most financial instruments.
Concentration of credit risk (yes or no) Market Risk (yes or no)
Concentration of credit risk (yes) - the risk that the other party to the instrument will not perform - must be disclosed.
Market risk (no) - the risk of loss from changes in the market prices - is encouraged, but not required.
True or false: Both carrying value (amount) and fair value must be disclosed for most financial instruments
True
when it is practicable to estimate fair value
Where in the financial statements should a company disclose information about its concentration of credit risks?
- Managements report to shareholders
- Notes to the financial statements
- Supplementary information to the financial statements
the notes to the financial statements
True or false: Entities may choose to measure certain assets and liabilities at fair value. The fair value option applies to financial assets (e.g., debt and equity securities) and liabilities (e.g., notes payable). Excluded from the fair value option are investments in susidiaries, pension benefit assets/liabilities and assets and liabilities under leases.
True
Equity securities are generally reported at FV through net income. Unrealized holding gains and losses on equity securities are included in earnings as they occur. (true or false)
true
True or false: Entities should report marketable debt securities classified as trading at fair value, with holding gains including in earning only to the extent of previously recognized holding losses.
False, It will be classified as trading at fair value, with holding gains and losses included in earnings
trading debt securities are reported at FV but there is no restriction on the recognition of holding gains
