FAR 3 - Marketable Securities

Question 1

Define trading securities?

Answer 1

Trading securities are CURRENT ASSETS

-Trading securities are those securities (both debt and equity) that are bought and held principally for the purpose of selling them in the near term.

Question 2

Define available-for-sale securities?

Answer 2

Available-for-sale securities are NONCURRENT ASSETS (GR)

-Available-for-sale securities are those securities (both debt and equity) not meeting the definitions of the trading and held-to-maturity

Question 3

Define held-to-maturity securities (DEBT SECURITIES ONLY)

Answer 3

Held-to-maturity securities are NONCURRENT ASSETS (GR)

• Bonds of another company DEBT SECURITIES ONLY
• 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 4

How are trading securities valued? What is the journal entry for unrealized gains and losses for trading securities?

Answer 4

Trading securities are valued at fair value (Mark to Market)

Journal entry to record loss on INCOME STATEMENT

Dr: Unrealized loss on trading securities
Cr: Valuation account

Question 5

How are available-for-sale securities valued? What is the journal entry for unrealized gains and losses for available-for-sale securities?

Answer 5

Available-for-sale securities are valued at fair value (Mark to Market)

Journal entry to record loss in OTHER COMPREHENSIVE INCOME

Dr: Unrealized loss on available-for-sale securities
Cr: Valuation account

Question 6

How are realized gains and losses recognized when a security is sold when an available-for-sale security is deemed to be impaired?

Answer 6

All realized gains or losses are recognized on the income statement

Question 7

How are held-to-maturity securities valued?

Answer 7

Amortized Cost

Question 8

How do securities relate to tax return?

Answer 8

DIFFERENCE IS DEFERRED TAXES
GAAP = Income/Loss
Tax return = Not taxable (until sold)
= Deferred Taxes

Question 9

Reclassification from trading to any other category?

Answer 9

The unrealized holding gain or loss at the date of transfer is already recognized in earnings

Question 10

Reclassification from any other category to trading?

Answer 10

The unrealized holding gain or loss at the date of transfer shall be recognized in earning IMMEDIATELY

Question 11

Reclassification from held-to-maturity to available-for-sale?

Answer 11

The unrealized holding gain or loss at the date of transfer will be reported in other comprehensive income at FAIR VALUE.

Question 12

Reclassification from available-for-sale to held-to-maturity?

Answer 12

The unrealized holding gain or loss is already reported in other comprehensive income. The unrealized holding gain or loss shall be amortized in INCOME STATEMENT over the remaining life of the security

Question 13

How do you record impairment of securities?

Answer 13

If the decline in fair value is other than temporary (Permanent), the cost basis of the security is written down to fair value. The difference between the cost basis and the fair value is a REALIZED LOSS in income statement.

Question 14

How do you record sale of security?

Answer 14

Record sale of security in Income Statement

Question 15

How do you record sale of trading security journal entry?

Answer 15

Trading Securities:

Dr: Cash
Cr: Trading Security
Cr: Realized gain on trading security (IDA) - INCOME FROM CONTINUING OPERATIONS

Question 16

How do you record sale of available-for-sale securities?

Answer 16

Available-for-sale securities:

Dr: Cash
Dr: Unrealized gain on available-for-sale security
Cr: Available-for-sale security
Cr: Realized gain on available-for-sale security (IDA) - INCOME FROM CONTINUING OPERATIONS