Investments

Question 1

How are Trading, Available for Sale, and Held to Maturity securities carried on the balance sheet at year end? How are their gains and losses reported?

Answer 1

Question 2

If the FV option is elected, how does that change treatment of all marketable debt securities as opposed to regular treatment (no election)

Answer 2

• AFS and HTM g/l’s are reported in income statement
• HTM is reported on BS at FV

Question 3

What is the equity method and how does the investor record its investments

Answer 3

**Investor has ability to significantly influence, holding 20-50% of voting stock. **
1) records investment initially at cost
2) Adjusts investment based on ownership % of investees net income. g/l’s go on IS
3) Reduces investment for dividends based on ownership %

Question 4

Formulas to solve unrealized gain/loss on bonds with accrued interest.

Answer 4

Question 5

Valuation Allowance - Key Concepts

Answer 5

Question 6

What are the key concepts of market risk vs credit risk.

Answer 6

Question 7

Which items for Available For Sale securities go to Net Income and which go to OCI? (6)

Answer 7

Question 8

What are the key characteristics of Held-to-Maturity (HTM) debt securities? (5)

Answer 8

Question 9

How are equity securities with less than 20% ownership reported on the financial statements?

Answer 9

Question 10

How do you calculate the historical cost of available-for-sale (AFS) debt securities given fair value, credit loss, unrealized gains, and unrealized losses?

Answer 10

Question 11

How do you calculate the income or loss from an investment in equity securities (less than 20% ownership) when dividends and unrealized gains or losses are involved?

Answer 11

Question 12

How do you calculate the adjustment to the valuation allowance for available-for-sale (AFS) securities?

Answer 12

Question 13

What are the Influence levels and name of accounting methods for stock investments not measured at fair value (FV) for ownership levels < 20%, 20% to 50%, and > 50%?

Answer 13

Question 14

What disclosures are required when using the equity method for stock investments (20% to 50% ownership)?

Answer 14

Question 15

How do you calculate goodwill for an investment accounted for using the equity method?

Answer 15

Question 16

What are the key rules for applying the equity method, and how do recognizing income and dividends affect financial statements?

Answer 16

Question 17

How does owning preferred stock affect influence, dividends, and net income?

Answer 17

Question 18

In investment context , How do you calculate the carrying value of bonds using the effective interest method?

Answer 18

Question 19

How to calculate the gain from selling stock rights:

Answer 19

Question 20

How are PPE and inventory fair value adjustments treated under the equity method

Answer 20

Question 21

Trading, AFS, HTM securities Sim

Answer 21

Question 22

Equity method and less than 20% influence Balance Sheet and Income Statement Activity impacts

Answer 22

Question 23

Equity method sim

Answer 23

Question 24

If a company reclassifies investments from AFS to HTM, what happens to the unrealized losses?

Answer 24

All unrealized losses up to the reclassification date go into OCI and stay in stockholders’ equity (AOCI).
It doesn’t matter if the losses happened in a prior year — they all count when the reclass happens.

Example:

$75K unrealized loss from last year

$45K more loss this year

Total $120K goes to OCI in the year of reclass

Question 25

🧠An AFS debt security has: Cost = $200,000 both years MV: Yr 3 = $185K, Yr 4 = $195K Allowance: Yr 3 = $5K, Yr 4 = $2K **What amount goes to OCI in Year 4, and why?**

Question 26

An AFS debt security has: Cost = $200,000 both years Market Value: Yr 3 = $185K, Yr 4 = $195K Allowance for credit loss: Yr 3 = $5K, Yr 4 = $2K What amount goes to **OCI** in Year 4, and why?

Answer 26

1. FV increase: $195K − $185K = $10K total gain 2. Credit loss reversed: $5K − $2K = $3K (goes to income stmt) 3. OCI = remainder: $10K − $3K = $7K to OCI OCI = Change in Fair Value − Change in Credit Loss Allowance Where: * FV Change = Current FV − Prior FV * Allowance Change = Prior Allowance − Current Allowance  - If allowance increased → it's a new credit loss  - If allowance decreased → it's a credit recovery You're still subtracting the result either way — because all credit effects go to the income statement, and OCI gets what’s left.

Question 27

Mayce holds two trading securities: * Bond: cost $268K, FV $320K * Other debt: cost $75K, FV $70K What goes on the balance sheet and income statement, and how is bond cost handled?

Answer 27

Question 28

Alpha Co. buys a $500K, 5% bond for $516,250, including 3 months of accrued interest. Year-end FV = $512,000. What unrealized gain/loss goes on the income statement, and how do you handle the accrued interest?

Answer 28

✅ Step 1 – Back out accrued interest * $500K × 5% × (3/12) = $6,250 * Actual bond investment = $516,250 − $6,250 = $510,000 ✅ Step 2 – Compare to FV * FV = $512,000 * Unrealized gain = $512K − $510K = $2,000 ✅ Step 3 – Reporting * Trading securities → report gain in net income * Accrued interest = separate receivable, not part of cost 📌 Key Rule: Always subtract accrued interest from purchase price when calculating unrealized gains/losses.

Question 29

An AFS debt security had an unrealized loss recorded in OCI (Year 1). In Year 2, the security was sold for the same value as FV in Year 1. What entry removes the unrealized loss, and why?

Answer 29

* The unrealized loss was a debit to OCI in Year 1 (loss = debit, just like expense) * When the bond is sold, the loss becomes realized, so you must reverse the OCI entry ✅ Reclassification entry: * Credit OCI to remove the loss * Report realized loss in net income * Remove the investment from books 📌** OCI acts like a temporary income statement:** * Unrealized losses = debit * Unrealized gains = credit * But it bypasses net income and flows to equity as Accumulated OCI ✅ Correct answer: Credit OCI to reverse the loss

Question 30

A debt security is transferred from trading to available-for-sale (AFS). Cost exceeds fair value. What value is used for the transfer, and what are the general reclassification rules?

Answer 30

✅ Use: Fair value (market value) on transfer date 🚫 Cost is never used, regardless of whether the loss is temporary or permanent

Question 31

🧠 Sun Corp had AFS debt securities (original cost $650K). Dec 31, Year 2 FV = $575K June 30, Year 3 FV = $530K → reclassified to HTM Dec 31, Year 3 FV = $490K What unrealized loss is reported in Year 3 stockholders' equity? How is the FV drop after reclassification handled?

Answer 31

Step 1 – Before reclassification (FV still matters): * Dec 31 Y2 loss = $650K − $575K = $75K * June 30 Y3 loss = $575K − $530K = $45K * Total OCI loss = $120K → goes to accumulated OCI (AOCI) in equity Step 2 – After reclassification to HTM: * HTM securities are carried at amortized cost * Ignore FV changes after June 30 — do not include drop to $490K ✅ Answer: Sun reports $120,000 net unrealized loss in stockholders' equity (Future FV changes are not recorded for HTM) 📌 Key Rule: AFS → HTM: Record unrealized loss in OCI at reclass, then freeze it HTM = amortized cost, not fair value

Question 32

An AFS debt security had: * Cost = $75,000 * FV at 12/31/Y1 = $30,000 → unrealized loss = $45K * FV at 12/31/Y2 = $60,000 Smoke, Inc. also reclassified a trading security to AFS at $50K FV with a 70k CV, with no FV change afterward. What is the valuation allowance adjustment at 12/31/Y2, and what shortcut applies?

Answer 32

✅ Prior unrealized loss = $75K − $30K = $45K ✅ New unrealized loss = $75K − $60K = $15K ➡️ $30K decrease in valuation allowance 📌 Shortcut Rule: If cost stays the same, then: 👉 Change in valuation allowance = change in fair value ($30K FV increase = $30K decrease to unrealized loss account) The trading security's carrying cost was $70K, but when reclassified to AFS, it’s recorded at fair value ($50K). The $20K loss is recognized in net income, not OCI, and it does not affect the AFS valuation allowance.