Marketable Securities

Question 1

Equity securities

Answer 1

Securities that represent an ownership interest in an enterprise or the right to acquire or dispose of an ownership interest in an enterprise at fixed or determinable prices

Question 2

What are not considered equity securities?

Answer 2

• Preferred stock redeemable at the option of investor
• Treasury stock
• Convertible bonds

Question 3

Categories of equity securities

Answer 3

1. Trading securities
2. Available-for-sale securities
3. Held-to-maturity securities (debt securities)

Question 4

Trading securities

Answer 4

Securities (debt and equity) that are bought and held principally for purpose of selling them in near term

Current assets

Question 5

Available-for-sale securities

Answer 5

Securities (debt and equity) not meeting definition of other 2 classifications

GR = Noncurrent asset

Question 6

Held-to-maturity securities

Answer 6

Investments in debt securities when corporation has positive intent and ability to hold securities to maturity

GR = Noncurrent asset

Question 7

Fair value

Answer 7

Marked to market

Question 8

How are trading securities valued?

Answer 8

Fair value

Question 9

Where are unrealized gains and losses on trading securities recorded?

Answer 9

Earnings (income statement…Ida)

Dr. Unrealized loss on trading securities
Cr. Valuation account (FV adjustment)

Question 10

How are AFS securities value?

Answer 10

Fair value

Question 11

Where are unrealized gains and losses on AFS securities recorded?

Answer 11

Other comprehensive income (pUfe)

Dr. Unrealized loss on AFS securities
Cr. Valuation account (FV adjustment)

Question 12

When are realized gains and losses recognized?

Answer 12

When a security is sold and when an AFS security is deemed impaired (recognized in IS)

Question 13

How are held-to-maturity securities valued?

Answer 13

At amortized cost

Question 14

How are transfers from one security group to another accounted for?

Answer 14

At fair value

Question 15

Where is the unrealized holding gain or loss from transferring a security FROM the trading category accounted for?

Answer 15

At the date of transfer, it is already recognized in earnings and shall not be reversed

Question 16

Where is the unrealized holding gain or loss from transferring a security TO the trading category accounted for?

Answer 16

At the date of transfer, it shall be recognized in earnings immediately

Question 17

Where is the unrealized holding gain or loss from transferring a debt security held as held-to-maturity to the AFS accounted for?

Answer 17

At the date of transfer, it shall be reported in OCI (amortized => FV)

Question 18

Where is the unrealized holding gain or loss from transferring a debt security held as AFS to the held-to-maturity accounted for?

Answer 18

At the date of transfer, it is already reported in OCI. It shall be amortized over the remaining life of the security as an adjustment of yield in a manner consistent w/ amortization of any premium/discount (amortize into IS)

Question 19

Under US GAAP, how is it accounted for if there is a decline in value below the adjusted/amortized cost of any security classified as either AFS or held-to-maturity that is other than temporary?

Answer 19

The cost basis of the individual security is written down to FV as the new cost basis and the amount of the write-down is accounted for as a REALIZED loss and included in earnings

Question 20

How is a sale of a security accounted for?

Answer 20

Realized gain or loss is reported on the IS for the period

Valuation account removed on sale of security

Question 21

Are unrealized gains and losses deductible for tax purposes?

Answer 21

No, therefore the tax effects must be reflected in the computation of deferred income taxes

Question 22

What information must be disclosed regarding AFS and held-to-maturity securities?

Answer 22

1. Aggregate FV
2. Gross unrealized holding gains/losses
3. Amortized cost basis by major security type
4. Info about the contractual maturities of debt securities

Question 23

When the FV of an investment in debt securities exceeds its amortized cost, how should held-to-maturity and AFS securitied be reported at end of year?

Answer 23

Held-to-maturity: Amortized cost

AFS: Fair value

Question 24

How are equity securities presented in the BS?

Answer 24

Net of unrealized gains/losses

Question 25

Under IFRS, how are reversals of impairment losses accounted for?

Answer 25

They are allowed and the increase would be booked to the current year’s income statement