Investments

Question 1

Available for sale - fair value option

Answer 1

When the fair value option is elected, the available for sale securities gains/losses will be reported on the I/S no longer under other comp income.
If the FV option is elected, realized and unrealized gains and losses from avail-for-sale securities are included in earnings of the period (I/S).

Question 2

Transfer of security among categories of investments

Answer 2

Use the fair value, if FV is less than the carrying amount at the date of transfer, it is irrelevant whether the decline is temporary or permanent.

Question 3

Equity method - Excess of Cost over Book Value

Answer 3

Generally attributable to:
Excess of fair value over book value, when the fair values of the investee’s assets are greater than their book values and,
Goodwill, when the investee has high earnings potential for wihch the investor has paid more than the fair values of the other net assets

Question 4

Equity method - Excess of Book value over Cost

Answer 4

Generally attributable to:
Excess of book value over fair value, when the book value of the net assets of the investee are greater than their fair values, and
Excess of fair value over cost, when the cost of the investments is less than even the fair values fo gthe investee’s net assets. “Negative Goodwill”

Question 5

Stock dividends recorded by investor

Answer 5

No entry is prepared to record the receipt of stock dividend. Investor would make a Memo entry to record the additional number of shares owned, while leaving the balance in the investment account unchanged.

Question 6

Cash surrender value of a life insurance policy

Answer 6

When a co. insures the lives of employees and names itself the beneficiary, the cash surrender value of the policies is considered an asset. During the first few years of a policy, no cash surrender value may accure. If there’s no increase in cash surrender value the JE:
Dr. Ins exp
Cr. Cash

If cash surrender value increases part of the cash paid is recorded as an increase in the CSV
Dr. Ins. exp
Dr. CSV
Cr, cash
the increase in CSV decreases ins exp bc the same amount of cash paid must be allocated between the two accounts. The increase in CSV does not affect investment income or deferred charges.