FAR 8 Flashcards
(20 cards)
How are HTM investments reported?
At amortized cost
Can HTM be reported at fair value?
Yes - you can elect to do this with fair value adjustment then recognized in earnings
In addition to the price what else is included in the cost of the HTM
- Costs include brokerage and transfer fees if applicable
Unrealized gains and losses are NOT tracked or measured for HTM investments
HTM - JE
To record investment:
dr. HTM investment $100,000
cr. cash $100,000
Interest income:
dr. cash $1,000
cr. interest income $1,000
Which investments are evaluated for impairment?
HTM - Yes
AFS - Yes
T/S - No
Where are impairments losses for both AFS and HTM recognized
impairment loss is recognized in earning stand the investment is written down to fair value
How is AFS changes reported in stockholders Equity
Stockholder’s equity reports AOCI which s the cumulative changes. It is equal to the difference between cost and the market value of the share on the B/S
Cost - 150
market - 130
net unrealized loss = 20
what is the normal balance of OCI?
credit (+)
OCI
dr. (-) cr. (+)
What do you do if you reclassify an AFS to HTM
The transfer occurs at its market value on the date of the transfer ($530,000)
Any unrealized holding gain or loss that was in OCI previous to the transfer date ($75,000) plus any new from the B/S date to the time of the transfer ($45,000) are:
1) Kept in OCI ($120,000)
2) Amortized as an adjustment to the effective interest rate on the HTM security
what if you have an AFS that has been under water for two years in a row and the second year you decide that the loss is a permanent impairment - what would be the effect on net income and concurrent assets
Year 1 you would reduce the value of the asset to its fair value by reducing the valuation account and unrealized loss is recorded in OCI.
If in year two the fair value is the same, but determined to be permanent - the loss is considered a REALIZED loss which is recognized in net income
so - net current assets would be same (already at the lower FV amount) and the realized loss would reduce net income
what is the journal entry for unrealized gains / losses for AFS
Gains:
dr. investment
cr. unrealized gains OCI
Losses:
dr. unrealized losses OCI
cr. investment
What happens to OCI at the end of the period
It is closed out into AOCI.
AOCI’s has a balance that equals the cumulative net unrealized gain or loss on the securities since acquisition.
The entity will report the balance in AOCI which is the current period’s change in the net value of the investments
Are you required to disclose the fair values of a HTM security
yes - must be disclosed
with the HTM investment that is amortized - how do you classify the amortization
As an adjustment to interest income
How do you calculate the gain or loss on a T/S
The gain or loss is the difference between the sales proceeds and their carrying value
T/S are reported at their F.V. so the carrying value on the previous B/S would be the carrying value.
Cost: 17,500
B/S dec 31; 19,000
Sold for $22,000
gain on disposal: 22,000 - 19,000 = 3,000
how do you transfer debt securities between AFS and T/S
The transfer is always recorded at the fair value on the date of the transfer
When bond is purchased between interest dates at a discount - what is the amount paid
the fair market value of the bond = carrying value at the purchase date + interest accrued from last interest date to date of purchase
The carrying amount excludes the interest and will be lower than the amount of cash paid
When you buy it at a discount - the carrying value will be lower than the face amount of the bond
therefore the bond you buy at a discount will have a carrying amount:
- lower that the cash paid to the seller and
- lower than the face amount of the bond
When does GAAP REQUIRE the use of the fair value option
- the recognition of assets acquired
- liabilities assumed
- minority interests in business combinations reported as acquisitions
- the reporting of assets after recognition of an impairment loss
- T/S
- AFS
- All derivatives
What do you do when you reclassify an investment from AFS to HTM
AFS - the transfer occurs at market value on the date of the transfer.
Any unrealized holding gain or loss is recognized in OCI
It it then amortized as an adjustment to the effective interest rate on the HTM security
No portion is recognized in income
What is the JE for unrealized gain on AFS
dr. investment (increase)
cr. OCI (Increase)
