Question 1

In order to classify an investment as held-to-maturity, the company has to have the ability and the intent to hold the investment until it matures.

Accepted Answer

For an investment to be classified as held-to-maturity, the company must have both the intent and the ability to hold the investment until its maturity date. This classification is used for debt securities and reflects a company's commitment to hold these investments, rather than trading them.

Question 2

Transferring an investment from the trading category into any other category does not require that any entry be made to the company's accounts because any unrealized holding gains or losses on that investment have already been recognized.

Accepted Answer

Unrealized holding gains or losses on investments in the trading category are recognized in the income statement. When the investment is transferred to another category, the unrealized gain or loss is already reflected in the company's accounts, so no further entry is required.

Question 3

For Held-to-Maturity investments in debt securities, the investor company is required to disclose both the aggregate fair value of the investment and also the change in the net unrealized holding gains or loss to be included in the income statement.

Accepted Answer

For Held-to-Maturity investments, companies are required to disclose the aggregate fair value of these investments in the notes to the financial statements, but changes in the net unrealized holding gains or losses are not recognized in the income statement because these investments are measured at amortized cost, not fair value, on the balance sheet.

Question 4

For an investment classified as held-to-maturity, any unrealized gains and losses are both reported in the financial statements and also disclosed in the notes to the financial statements.

Accepted Answer

For investments classified as held-to-maturity, unrealized gains and losses are not recognized in the financial statements because these investments are measured at amortized cost. Unrealized gains and losses might be disclosed in the notes for informational purposes, but they do not impact the financial statements directly.

Question 5

The transfer of a security between investment categories is accounted for either at fair value at the time of the transfer or at cost, depending upon the type of transfer.

Accepted Answer

The answer of The transfer of a security between investment...

Question 6

When the investor owns more than 50% of the voting common stock of the investee, the investee is considered to be under the legal control of the investor.

Accepted Answer

Owning more than 50% of the voting common stock typically gives the investor the majority of voting rights, allowing them to make key decisions and control the investee.

Question 7

Significant influence of another company generally occurs when the investor owns between 25% and 45%. Due to this relationship the investor is required to issue consolidated financial statements.

Accepted Answer

Significant influence of another company, typically occurring when the investor owns between 20% and 50% of the voting stock, requires the use of the equity method for accounting, not the issuance of consolidated financial statements. Consolidated financial statements are required when there is control, usually indicated by ownership of more than 50%.

Question 8

Which of the following categories of investments are reported at their fair values on the balance sheet and have unrealized holding gains and losses included as a separate component of shareholders' equity?

Accepted Answer

Available-for-sale securities are reported at their fair values on the balance sheet, and unrealized holding gains and losses on these securities are recorded as a separate component of shareholders' equity, rather than in the income statement.

Question 9

Under U.S. GAAP investments are classified into three categories based upon management's intent. IFRS also divides investments into three classifications, but those classifications are based on the company's business model for managing financial assets and the characteristics of the cash flows of the financial asset.

Accepted Answer

Under U.S. GAAP, investments are classified as held-to-maturity, available-for-sale, or trading based on management's intent. IFRS classifies investments based on the business model for managing the assets and the cash flow characteristics, leading to classifications such as amortized cost, fair value through other comprehensive income, and fair value through profit or loss.

Question 10

Investment securities are classified based upon management's intent. This may present difficulties to readers of financial statements because

Accepted Answer

Management's judgment of intent and ability may lack comparability since different companies may have different intentions and abilities when it comes to investing in securities. This can make it difficult for readers of financial statements to compare and understand the nature of the investments being made.

Question 11

Investments in debt securities include all of the following except

Accepted Answer

Preferred stocks are usually classified as equity securities, not debt securities. While they share similarities with debt securities in terms of providing a fixed income, they are still considered to be part of the equity class of securities.

Question 12

Investments that are typically held for short periods of time and sold by the company in the expectation of a profit on the short-term differences in price are classified as

Accepted Answer

Trading securities are investments that are held for short-term profit by buying and selling them in the short period. Available-for-sale securities are held for longer periods of time, and held-to-maturity securities are held until maturity date. Marketable securities are a broader group that includes both trading and available-for-sale securities.

Question 13

Which of the following securities are reported at their amortized cost on the balance sheet date?

Accepted Answer

Held-to-maturity debt securities are reported at amortized cost on the balance sheet date, while marketable securities, available-for-sale securities, and trading securities are reported at fair value.

Question 14

A note receivable should always be recorded at its present value using the borrower's incremental interest rate.

Accepted Answer

A note receivable is typically recorded at its face value when issued. The present value calculation using the borrower's incremental interest rate is relevant when the note is issued at a discount or premium, which reflects the difference between the market interest rate and the note's stated interest rate.

Question 15

The Unrealized Holding Gain/Loss-Trading Securities account is a temporary account that would be closed to
Retained Earnings during the closing process.

Accepted Answer

Unrealized holding gains or losses on trading securities are recognized in earnings and therefore, they are closed to Retained Earnings during the closing process.

Question 16

When a life insurance policy contains a guarantee that the company that purchased the policy is entitled to a return equal to the amount of the cash surrender value of the policy, a portion of the premium is recorded to a long term liability account.

Accepted Answer

The answer of When a life insurance policy contains a...

Question 17

In order for a derivative to be considered a hedge, it must be mostly effective in offsetting a substantial amount of risk exposure associated with changes in fair values or cash flows of the hedged item.

Accepted Answer

For a derivative to qualify as a hedge, accounting standards require it to be highly effective in offsetting the changes in fair value or cash flows attributable to the hedged risk, thereby substantially reducing the company's exposure to fluctuations in the hedged item's value or cash flows.

Question 18

Available-for-sale securities are recorded at cost, which equals fair value on the acquisition date.

Accepted Answer

Available-for-sale securities are initially recorded at cost, which is typically equal to their fair value on the acquisition date.

Question 19

Investments in debt and equity securities that are held for current resale by banks and brokerage firms are termed

Accepted Answer

Trading securities are investments in debt and equity that are purchased for the purpose of selling them in the near term to profit from short-term price fluctuations. Banks and brokerage firms often hold these for current resale.

Question 20

When an available-for-sale security is sold, any unrealized gains or losses would need to be reclassified from the Allowance for Change in Fair Value of Investments account in order to avoid double counting any gains or losses recorded in comprehensive income.

Accepted Answer

When an available-for-sale security is sold, any previously unrealized gains or losses that were recorded in other comprehensive income must be reclassified out of the equity section (specifically, from accumulated other comprehensive income) and recognized in the income statement to ensure that the gains or losses are not counted twice. This process adjusts for the fact that the gains or losses are now realized upon the sale of the security.

Quiz 13: Investments and Long-Term Receivables