Marketable Securities Flashcards
What are the 3 portfolios used to classify investments in securities?
Held-to-maturity
Available-for-sale
Trading securities
For investments classified as either trading securities or available-for-sale securities, what happens when dividends are received?
Dividends are recorded as dividend revenue by the owner. It is recorded on the date of record for the dividends. When cash is received the cash is recorded and the receivable is removed.
How are securities accounted for in the trading securities portfolio?
the entire portfolio is recorded at fair value
any change in the value of the portfolio is recorded on the income statement as an unrealized gain
if a trading security is sold, a realized gain or loss is recognized as the difference between FV at beginning of the year and the proceeds
How are securities accounted for in the available-for-sale portfolio?
the entire portfolio is recorded at fair value
any change in the value of the portfolio is recorded in other comprehensive income as an unrealized gain or loss. These unrealized gains/losses are reported in in other comprehensive income which flows through to accumulated other comprehensive income in stockholders’ equity
if an available-for-sale security is sold, a realized gain or loss is recognized as the difference between the original cost of the investment and the amount received
Able has the following performance for an investment
June 1, year 1 - buys stock at $10
Dec 31, year 1 - holds stock at $13
Dec 31, year 2 - holds stock at $12
Dec 31, year 3 - sells stock at $17
What is reported if this investment is accounted for as a trading security?
year 1, the value goes up $3 so an unrealized gain is recognized in the income statement
year 2, the value goes down $1 so an unrealized loss is recognized in the income statement
year 3, the value goes up $5 so a realized gain is recognized on the income statement
Able has the following performance for an investment
June 1, year 1 - buys stock at $10
Dec 31, year 1 - holds stock at $13
Dec 31, year 2 - holds stock at $12
Dec 31, year 3 - sells stock at $17
What is reported if this investment is accounted for as an available-for-sale security?
year 1, the value goes up $3 so an unrealized gain is recognized in other comprehensive income and accumulate year over year in accumulated other comprehensive income
year 2, the value goes down $1 so an unrealized loss is recognized in other comprehensive income, the accumulated other comprehensive income is now $2
year 3, the value goes up to $17 which is $7 over cost is a realized gain on investment. the $2 balance in AOCI is removed upon sale.
An entity buys a $20,000 bond for $19,000 in June of Year 1. By the end of year 1, this bond is worth $19,300. How is the investment reported if it is classified as being held-to-maturity?
for a bond that is being held-to-maturity, the bond is recorded at cost, and any premium or discount will be amortized to interest over the life of the bond. This amortization will be based on the effective rate method.
An entity has a portfolio of trading securities. At the end of year 1, the stocks had a cost of $10,000 but a FV of $9,000. At the end of year 2, the stocks held a cost of $18,000 but a FV of $20,000.
What amount of unrealized gain should the entity recognize in year 2 in connection with these trading securities?
year 1, FV was (1,000) under cost
year 2, FV is 2,000 above cost
therefore $3,000 unrealized gain would be recognized
An entity starts the year with an unrealized loss of $10,000 in AOCI, in relation to investment shares classified as AFS. During the period another unrealized loss of $3,000 was recognized so that the AOCI account registered $13,000 at the end of the year. The entity reports net income for the year of $100,000.
What is the effect on comprehensive income of this year’s events?
since there was a $3,000 unrealized loss in the AFS the comprehensive income for the year would be $100,000 - $3,000 = $97,000.
An entity is holding bonds that were classified as trading securities. On Dec 31, Year 1, they are reported at their FV of $47,000, although they have a maturity value of $50,000. The bonds originally had a cost of $45,000. On Jan 1, year 2, the entity decides that it will hold these bonds until maturity and thus, wants to move them from the trading security portfolio to the held-to-maturity portfolio.
How is that accomplished?
the amount is reclassified to HTM from TS. the book value is transferred and the difference ($3,000) is amortized over the remaining life of the bond,
An entity is holding securities that were classified as trading securities. On Dec 31, year 1, they are reported at their FV of $47,000, although they had an original cost of $45,000. On Jan 1, year 2, the entity decides that it wants to reclass these securities as AFS.
How is that accomplished?
reclass from TS to AFS. there is no difference in FV so no income effect.
An entity is holding bonds that were classified as held-to-maturity. On Dec 31, Year 1, they are reported at their book value of $47,000, although they have a maturity value of $50,000. The bonds originally had a cost of $45,000, but amortization of the discount has increased the recorded amount to $47,000. The bonds now have a FV of $52,000. On Jan 1, year 2, the entity decides that it wants to sell these bonds and thus, wants to move them to the trading securities portfolio.
How is that accomplished?
when they are reclassed to TS they must be reported at the FV of $52,000. This is recognized as a $5,000 unrealized gain on the income statement
An entity is holding bonds that were classified as held-to-maturity. On Dec 31, Year 1, they are reported at their book value of $47,000, although they have a maturity value of $50,000. The bonds originally had a cost of $45,000, but amortization of the discount has increased the recorded amount to $47,000. The bonds now have a FV of $52,000. On Jan 1, year 2, the entity decides that it might want to sell these bonds and thus, wants to move them to the AFS portfolio.
How is that accomplished?
when they are reclassed to TS they must be reported at the FV of $52,000. This is recognized as a $5,000 unrealized gain in other comprehensive income and an accumulation to AOCI.
Company A owns 1,000 shares of Company X. During the current year, X declares and issues a 10% stock dividend so that A receives 100 more shares. On that date, the value of the stock was $16 per share.
What j/e does A make?
What revenue does A recognize?
A makes no entry
A recognizes no revenue
a stock dividend is an increase in the shares of stock but the dollar value of the investment is unchanged only the carrying value per share is changed.
What is a liquidating dividend?
How does an entity that pays a liquidating dividend record it?
How does the owner who receives a liquidating dividend record it?
a liquidating dividend is one that is paid by an entity that does not have R/E
the entity that pays will reduce APIC rather than R/E
the owner that receives the dividend will reduce the investment account rather than record any dividend revenue
