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

Trading Securities

Answer 2

• current assets
• Securities (both debt and equity) that are bought and held principally for the purpose of selling them in the near term.
• short-term

Question 3

Available-for-Sale Securities (AFS)

Answer 3

• noncurrent (GR) assets
• Securities (both debt and equity) not meeting the definitions of the other two classifications (trading or held-to-maturity).

Question 4

Held-to-Maturity Securities

Answer 4

• debt securities only
• noncurrent assets (GR)
• Investments in debt securities are classified as held-to-maturity securities only if the corporation has the positive intent and ability to hold these securities to maturity.

Question 5

Valuation of Trading and AFS Securities

Answer 5

• reported at fair value
• changes in FV result in unrealized holding gains and losses (reporting for each type of security is different).
• realized gains/losses are recognized when security is sold or impaired, and recognized on income statement.

Question 6

Unrealized Gains/Losses - Trading Securities

Answer 6

Unrealized holding gains/losses on trading securities are included in earnings…shown in the income statement (IDA).

Question 7

Unrealized Gains/Losses - AFS Securities

Answer 7

Unrealized holding gains/losses on AFS securities (even those classified as current assets) are reported in other comprehensive income (PUFER).

Question 8

Valuation of Held-to-Maturity Securities

Answer 8

Valued at amortized cost.

No unrealized gain or loss.

Question 9

Reclassification of Securities

Answer 9

• Transfers between categories should occur only when justified.
• Transfers from HTM are rare. Transfers to and from trading are also rare.
• Any transfer from one security to another is accounted for at fair value.

Question 10

Impairment of Securities

Answer 10

If the decline in fair value is other than temporary, the cost basis of the individual security is written down to fair value as the new cost basis and the amount of the write-down is accounted for as a realized loss and included in earnings.

Question 11

Sale of Security

Answer 11

A sale of a security from any category results in a realized gain or loss and is reported on the income statement for the period.

Question 12

Income Tax Effects when sold

Answer 12

Tax effects of unrealized gains or losses entering into the determination of net income must be reflected in the computation of deferred income taxes, bc unrealized gains/losses are not deductible for tax purposes.