Chapter 12

Question 1

Investment in debt securities are classified as _________ of the issuer.

Answer 1

Liabilities

Question 2

What are the components of return of investment in debt securities?

Answer 2

Interest income and gains from changes in fair value.

Question 3

This kind of investment is a contract usually available to the general public.

Answer 3

Investment in bonds

Question 4

How can investment in debt securities be classified as?

Answer 4

FVTPL
FVTOCI
at Amortized Cost

Question 5

Can an entity choose any of the three classifications, at its discretion, to account for each of its debt securities?

Answer 5

No.

Question 6

What should be considered in classifying debt securities?

Answer 6

1.) The business model of managing the financial asset

2.) The contractual cash flow characteristics of the financial asset

Question 7

This is how an entity manages its investments in debt securities to generate cash flows.

Answer 7

Business Model

Question 8

This business model refers to holding debt securities until maturity in order to collect the contractual cash flows.

Answer 8

Held-to-maturity

Question 9

This business model is the middle ground for debt securities.

Answer 9

Both held-to-maturity and held-for-selling

Question 10

This business model is selling debt securities to receive cash flows.

Answer 10

Held-for-selling

Question 11

This business model is evaluated in terms of performance based on interest income and credit quality of the securities.

Answer 11

Held-to-maturity

Question 12

This business model is evaluated in terms of performance based on overall return or the credit quality plus the fair valuation of the securities.

Answer 12

Both held-to-maturity and held-for-selling

Question 13

This business model is evaluated in terms of performance based on the realized and unrealized gains and losses and fair value of the securities.

Answer 13

Held-for-selling

Question 14

What risk affects the performance of held-for-maturity securities?

Answer 14

Credit risk

Question 15

What risk affects the performance of both held-for-maturity and held-for-selling securities?

Answer 15

Credit risk and market risk

Question 16

What risk affects the performance of held-for-selling securities?

Answer 16

Market risk

Question 17

True or False: The business model both held-to-maturity and held-for-selling possess the characteristics of both of the other business models.

Answer 17

True.

Question 18

This is the risk that one party to a financial instrument will cause a financial loss for the other party by failing to discharge an obligation.

Answer 18

Credit Risk

Question 19

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market prices.

Answer 19

Market Risk

Question 20

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in market interest rates.

Answer 20

Interest rate risk

Question 21

This is the risk that the fair value or future cash flows of a financial instrument will fluctuate because of changes in foreign exchange rates.

Answer 21

Currency risk

Question 22

True or False: The business model assessment shall be based on assertion or the intention of the management.

Answer 22

False. It should be based on facts.

Question 23

True or False: The business model assessment is made on an investment-by-investment basis.

Answer 23

False. It should be made on portfolio basis.

Question 24

This is defined as a collection of different financial assets for the purpose of managing investments.

Answer 24

Portfolio

Question 25

True or False: An entity can utilize all of the different classifications at the same to account for debt securities.

Answer 25

True.

Question 26

True or False: In assessing the business model, the worst case scenarios should be incorporated and considered.

Answer 26

False.

Question 27

What is the SPPI test?

Answer 27

The test whether the contractual cash flows are solely payment of principal and interest.

Question 28

How can an entity pass the SPPI test?

Answer 28

If it is consistent with a basic lending arrangement.

Question 29

Illustrate the summary of classification of debt securities.

Question 30

What are the circumstances that will fail the SPPI test?

Answer 30

1.) Leverage or the complex criteria in determining the amount of interest are considered as containing leverage. 2.) Excessive prepayment penalties 3.) Convertibility option on bonds

Question 31

True or False: An entity cannot apply the fair value option or irrevocably designate a debt security at FVTPL even if doing so will eliminate or significantly reduce the accounting mismatch.

Answer 31

False. An entity may be able to do this.

Question 32

When irrevocably designating a debt security, when is it made?

Answer 32

On the date of initial recognition

Question 33

True or False: The irrevocable designation at FVTPL will disqualify a debt security to be subsequently reclassified to either FVTOCI or at amortized cost later on.

Answer 33

True

Question 34

What rate should be used in the calculations of present values?

Answer 34

The market rate on the measurement date.

Question 35

This determines the amount of interest that can be actually received from the debt security.

Answer 35

Stated rate

Question 36

This is a type of debt security where there is a one-time principal payment on maturity date.

Answer 36

Term debt security

Question 37

This is a type of debt security where there are periodic payments of principal.

Answer 37

Serial debt security

Question 38

What PV factors are relevant for term debt securities?

Answer 38

Principal/Face amount: PV factor of single payment Periodic interest payments: PV of ordinary annuity

Question 39

What PV factors are relevant for serial debt securities?

Answer 39

series of PV factors of single payment

Question 40

What are the other names for stated rate?

Answer 40

Nominal rate or interest rate

Question 41

What are the other names for market rate?

Answer 41

Effective rate or discount rate

Question 42

What is the effect of fair value > face amount?

Answer 42

Premium

Question 43

What is the effect of fair value < face amount?

Answer 43

Discount