FR 3 Comparison & Transfer of Investments Results

Sun Corp. had investments in marketable debt securities costing $650,000 that were classified as available-for-sale. On June 30, Year 2, Sun decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments' fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. Sun does not elect the fair value option to account for these investments. What amount of loss from investments should Sun report in its Year 2 income statement? A) $45,000 B) $85,000 C) $120,000 D) $0

D) $0 --> Reason: The requirement is to determine the amount of loss on investments to be reported in Sun's Year 2 income statement. This transfer is accounted for at fair value, and any holding gains or losses on securities that are transferred to held-to-maturity from available-for-sale are reported as accumulated other comprehensive income. This amount is then amortized over the remaining life of the security as an adjustment to yield. Since cost is greater than fair value by $75,000 at 12/31/Y1 ($650,000 cost − $575,000 fair value), the following entry would be recorded: Unrealized loss 75,000 Marketable debt securities 75,000 Then on June 30, Year 2, when Sun decides to hold the investments to maturity, an additional $45,000 will be recorded in the valuation account ($575,000 value on books − $530,000 FV) to reflect the change in FV. The following entry would be recorded: Unrealized loss 45,000 Marketable debt securities 45,000 Each year the unrealized loss would be reported as other comprehensive income that would be closed to accumulated other comprehensive income.

Cook Company had the following debt investment portfolio that were purchased during Year 2. Bonds Classification Cost Fair Value 12-31-Y2 Company R Available-for-sale $30,000 $32,000 Company S Trading $42,000 $46,000 Company T Available-for-sale $15,000 $18,000 Cook elects to use the fair value option for reporting all of its financial assets. What is the unrealized gain recognized on the income statement in Year 2? A) $0 B) $4,000 C) $5,000 D) $9,000

D) $9,000 --> Reason: Cook elects to use the fair value option. Cook will value both its trading securities and available-for-sale securities at fair value and record the unrealized gains in earnings for the period. The gain is equal to: $96,000 = ($32,000 + $46,000 + $18,000) $87,000 = ($30,000 + $42,000 + $15,000) $9,000 = 96,000 - 87,000.

The method of accounting for debt investments is based on the investor's intent for holding the investment. When investor intent changes, the classification of and accounting for the debt investment changes. When debt investments are transferred between classifications, which one of the following valuation basis is most likely to be used when recording the investment in the new classification? A) Historic cost B) Amortized cost C) Prior carrying value D) Fair value

D) Fair value --> Reason: Fair value is the valuation basis used when debt investments are transferred between classifications. Conceptually, the existing carrying value is written off and the current fair value is written on in the new classification, with any difference being an unrealized gain or loss.

Clarion had the following investments in its portfolio that were purchased during year 2. Investment Classification Cost Fair Value 12-31-Y2 CS of Company X Fair value $100,000 $121,000 Bond of Co. Y Available-for-sale $96,000 $101,000 Bond of Co. Z Held-to-maturity $64,000 $63,000 On December 31, Year 2, the amortized cost of Bond Y was $97,000, and the amortized cost of Bond Z was $63,500. Clarion does not elect the fair value option for reporting financial assets. What amount should Clarion record as an unrealized gain in its Year 2 income statement? A) $21,000 B) $25,000 C) $26,000 D) $0

A) $21,000 --> Reason: If Clarion does not elect the fair value option for valuing its financial assets, the rules of ASC Topic 320 apply. Both the Company X stock investment and the Company Y bond available-for-sale security investment would be reported at fair value. However, only the $21,000 unrealized gain associated with the Company X stock investment would be reported in earnings of the period. The unrealized gain of $4,000 on the Company Y bond available-for-sale security investment would be reported in other comprehensive income (OCI). The Company Z bond held-to-maturity security investment would be reported at amortized cost.

A debt security is transferred from the held-for-trading portfolio to the available-for-sale portfolio. At the transfer date, the security's cost exceeds its fair value. What amount is used at the transfer date to record the security in the available-for-sale portfolio? A) Fair value, regardless of whether the decline in fair value below cost is considered permanent or temporary B) Fair value, only if the decline in fair value below cost is considered permanent C) Cost, if the decline in fair value below cost is considered temporary D) Cost, regardless of whether the decline in fair value below cost is considered permanent or temporary

A) Fair value, regardless of whether the decline in fair value below cost is considered permanent or temporary --> Reason: Reclassifications between the two investment categories are always recorded at fair value. The reclassification is treated as if the security in the old classification was sold and the security in the new classification was purchased. Fair value reflects a brand-new valuation and is treated as original cost from then on for the purpose of the annual year-end revaluation adjustment.

For an available-for-sale (AFS) security transferred into the trading category, the portion of the unrealized holding gain or loss at the date of the transfer that has not been previously recognized in earnings shall be: A) Recognized in earnings immediately. B) Amortized over the period to date of sale. C) Transferred to other comprehensive earnings. D) Deferred and recognized when the security is sold.

A) Recognized in earnings immediately. --> Reason: When an AFS security is transferred to trading, all unrealized gains or losses in accumulated other comprehensive income (AOCI) are recognized immediately and transferred to earnings.

Which, if any, of the following transfers between classifications of debt investments are possible? Held-to-maturity to held-for-trading/Held-for-trading to held-to-maturity A) Yes/Yes B) Yes/No C) No/Yes D) No/No

A) Yes/Yes --> Reason: Both transfers from held-to-maturity to held-for-trading classifications and from held-for-trading to held-to-maturity classifications can occur in the accounting for debt investments.

On January 2, Year 1, Well Co. purchased 10% of Rea, Inc.'s outstanding common shares for $400,000. Well is the largest single shareholder in Rea, and Well's officers are a majority on Rea's board of directors. Rea reported net income of $500,000 for Year 1 and paid dividends of $150,000. Well does not elect the fair value option to report its investment in Rea. In its December 31, Year 1, balance sheet, what amount should Well report as investment in Rea? A) $450,000 B) $435,000 C) $400,000 D) $385,000

B) $435,000 --> Reason: Ownership of less than 20% leads to the presumption of no substantial influence unless evidence to the contrary exists. Well's position as Rea's largest single shareholder and the presence of Well's officers as a majority of Rea's board of directors constitute evidence that Well does have significant influence despite less than 20% ownership. Therefore, the equity method is used. The investment account had a beginning balance of $400,000 (purchase price). This amount is increased by Well's equity in Rea's earnings (10% ownership × $500,000 income = $50,000) and decreased by Well's dividends received from Rea (10% share × $150,000 total div. = $15,000), resulting in a balance of $435,000. ***** 400,000 + (500,000 x 0.1) - (150,000 x 0.1) = $435,000

Jill Corp. had investments in marketable debt securities purchased on January 1, Year 1, for $650,000 that were classified as trading securities. On June 30, Year 2, Jill decided to hold the investments to maturity and accordingly reclassified them to the held-to-maturity category on that date. The investments' fair value was $575,000 at December 31, Year 1, $530,000 at June 30, Year 2, and $490,000 at December 31, Year 2. Jill elects the fair value option for reporting these held-to-maturity securities. What amount of loss from investments should Jill report in its Year 2 income statement? A) $40,000 B) $85,000 C) $160,000 D) $0

B) $85,000 --> Reason: An election can be made to use the fair value option when financial assets cease to qualify for fair value treatment due to specialized accounting rules. On June 30, Year 2, the trading securities were reclassified to the held-to-maturity category, and an election was made to report them at fair value. On June 30, Year 2, the held-to-maturity securities were valued at $530,000, and Jill would recognize a loss of $45,000 ($575,000 − $530,000). At December 31, Year 2, the securities declined in value an additional $40,000. Therefore, the total loss recognized in Year 2 was $85,000 ($45,000 + $40,000). ***** (575,000 - 530,000) + (530,000 - 490,000) = $85,000

On December 31, Year 1, Ott Co. had investments in marketable debt securities as follows: Cost Market value Mann Co. $10,000 $8,000 Kemo, Inc. $9,000 $10,000 Fenn Corp. $11,000 $9,000 ------------------------ $30,000 $27,000 The Mann investment is classified as held-to-maturity, while the remaining securities are classified as available-for-sale. Ott does not elect the fair value option for reporting financial assets. Ott's December 31, Year 1, balance sheet should report total marketable debt securities as: A) $26,000. B) $28,000 C) $29,000 D) $30,000

C) $29,000 --> Reason: ASC Topic 320 requires that held-to-maturity securities be carried at amortized cost and that available-for-sale and trading securities be carried at fair value (FV). Therefore, Ott's investment portfolio is reported at 12/31/Y1 at the following amounts: Bond Amount reported Mann Co.* $10,000 cost Kemo, Inc.** $10,000 FV Fenn Corp.** $9,000 FV ----------- $29,000 *Held-to-Maturity **Available-for-Sale