F5 M1 Financial Instruments

Question 1

what is the fair value option?

Answer 1

entities can choose to measure financial instruments at fair value for instruments that are typically not; this is irrevocable

Question 2

what instruments are not eligible for the fair value option?

Answer 2

1) investments in subsidiaries
2) variable interest entities required to consolidate
3) pension assets and liabilities
4) leases
5) equity instruments
6) deposit liabilities

Question 3

when can fair value elections be applied?

Answer 3

1) date entity recognizes eligible financial instrument
2) investment subject to equity accounting
3) entity stops to consolidate investment in subsidiary or VIE

Question 4

debt securities include:

Answer 4

1) corporate bonds
2) redeemable preferred stock
3) government securities
4) convertible debt
5) commercial paper

Question 5

what are trading securities?

Answer 5

held for purpose of selling in near term; reported at fair value and included in earnings

Question 6

what are held to maturity debt securities?

Answer 6

intent to hold securities to maturity; reported at amortized cost

Question 7

what are available for sale securities?

Answer 7

to hold security for an indefinite period of time but not to maturity; reported at fair value and included in OCI

Question 8

what is fair value?

Answer 8

the market price or what buyer/seller is willing to pay and accept

Question 9

how should the trading to another security be valued? what should be done about gains or losses?

Answer 9

at fair value; already recognized in income so no adjustment

Question 10

how should any other security to trading be valued? what should be done about gains or losses?

Answer 10

at fair value; gains and losses recognized in current earnings

Question 11

how should HTM to AFS be valued? what should be done about gains or losses?

Answer 11

at fair value; gains and losses recognized in OCI

Question 12

how should AFS to HTM be valued? what should be done about gains or losses?

Answer 12

at fair value; amortize gain or loss from OCI with any bond premium/discount

Question 13

how do you account for impairment of HTM securities?

Answer 13

investment reported at present value of principal and interest expected to be collected; credit loss is present value - amortized cost

Question 14

how do you account for impairment of AFS securities?

Answer 14

1) find credit loss; present value of security - amortized cost
2) the remainder of loss when amortized cost is greater than fair value of security is recorded in OCI

Question 15

what is the JE to record a loss to net income on trading securities?

Answer 15

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

Question 16

what is the JE to record a loss to OCI for AFS?

Answer 16

Dr. Unrealized loss on AFS
Cr. Valuation account (fair value adjustment)

Question 17

what is the JE to record a gain to net income in trading securities? what about AFS?

Answer 17

AFS: Dr. Valuation account (fair value adjustment)
Cr. Unrealized gain on AFS

TS: Dr. Valuation account (fair value adjustment)
Cr. Unrealized gain on TS

Question 18

what is the JE for credit loss on security if loss amount less than CECL amt for AFS?

Answer 18

Dr. Credit loss
Cr. Allowance for credit losses

Question 19

what is the JE for credit loss on security ig loss amt more than CECL amt for AFS?

Answer 19

Dr. Credit loss
Dr. Unrealized loss on AFS
Cr. Allowance for credit loss (CECL amt)
Cr. Valuation account (fair value adjustment)

Question 20

JE for sale of trading security if gain? loss?

Answer 20

Dr. Cash
Cr. Trading security (cost +/- unrealized gains and losses)
Cr. Realized gain on trading security (adjusted cost - selling price)

Dr. Cash
Dr. Realized loss on trading security
Cr. Trading security

Question 21

JE for sale of AFS if gain? loss?

Answer 21

Dr. Cash
Dr. Unrealized gain on AFS
Cr. AFS
Cr. Realized gain on AFS (selling price - original cost)

Note: any accumulated unrealized gains/losses in OCI at time of sale must be reversed

Question 22

what are equity securities?

Answer 22

represents ownership interest in entity

ex. common, preferred stock, stock warrants, rights, call options, put options

Question 23

how are equity securities carried at?

Answer 23

fair value through net income

Question 24

what is the practicability exception?

Answer 24

can measure an equity investment at cost - impairment and + or - observable price changes for similar investments; applicable for equity investments with no readily determinable fair value

Question 25

JE for recording dividend income

Answer 25

Dr. Cash Cr. Dividend income

Question 26

JE for recording liquidating dividend

Answer 26

Dr. Cash Cr. Investment in investee Note: liquidated dividend is when a dividend is paid in excess of company's retained earnings

Question 27

indicators that equity investment could be impaired

Answer 27

1) debt covenant compliance 2) negative cash flows 3) working capital deficiencies 4) changes in environment 5) decline in earnings 6) decline in credit rating 7) offer to buy investment from investee at lower than investor carrying value

Question 28

JE for sale of equity security with no gain or loss? If gain or loss?

Answer 28

Dr. Cash Cr. Equity security Dr. Cash Cr. Equity security Cr. Gain on equity security Dr. Cash Dr. Loss on equity security Cr. Equity security

Question 29

what are some disclosures for AFS and HTM securities?

Answer 29

1) aggregate fair value 2) gross unrealized holding gains/losses 3) amortized cost basis by security type 4) info about contractual maturities of debts