Short Term Investment Paper 1

Answer (D) is correct. Assuming the fair value option has not been elected, held-to-maturity securities are reported at amortized cost, with no unrealized gains or losses reported.

Answer (B) is correct. Assuming the fair value option has not been elected, unrealized holding gains and losses on available-for-sale securities are reported in other comprehensive income. (But all or part of unrealized holding gains and losses on available-for-sale securities designated and qualifying as hedged items in a fair value hedge are recognized in earnings.)

Answer (D) is correct. Trading securities are bought and held primarily for sale in the near term. They are purchased and sold frequently. They are initially recorded at cost but are remeasured at fair value at each balance sheet date, with the unrealized holding gains or losses recognized in earnings.

Answer (B) is correct. Absent an election of the fair value option, investments in debt securities must be classified asheld-to-maturity and measured at amortized cost in the balance sheet if the reporting entity has the positive intent and ability to hold them to maturity.

Answer (D) is correct. Trading securities are debt securities not classified as held to maturity and equity securities with readily determinable fair values that are bought and held primarily for sale in the near term. Hence, the bonds and the equity securities are trading securities. They are initially recorded at cost but are subsequently measured at fair value at each balance sheet date. Quoted market prices in active markets are the best evidence of fair value. Based on market quotes at year end, the bonds had a fair value of $105,000, and the equity securities had a fair value of $50,000. The total is $155,000.

Answer (D) is correct. Trading securities are those held principally for sale in the near term. They are classified as current and consist of debt securities and equity securities with readily determinable fair values. Unrealized holding gains and losses on trading securities are reported in earnings. On a statement of financial position, these securities are reported at fair value.

Answer (B) is correct. Trading securities are reported at fair value, and unrealized holding gains and losses are included in earnings. Consequently, the securities should be reported as $28,000.

Answer (B) is correct. Marketable equity securities may be classified as either trading or available-for-sale (assuming no election of the fair value option). Equity securities that are not expected to be sold in the near term should be classified as available-for-sale. These securities should be reported at fair value, with unrealized holding gains and losses (except those on securities designated as being hedged in a fair value hedge) excluded from earnings and reported in OCI.

Answer (D) is correct. Unrealized holding gains and losses on available-for-sale securities, including those classified as current assets, are not included in earnings but ordinarily are reported in OCI, net of tax effects (ignored in this question). At December 31, Year 2 (assuming the securities are not designated as being hedged in a fair value hedge), OCI should have been debited for $10,000 for the excess of cost over fair value to reflect an unrealized holding loss. At December 31, Year 3, OCI should be credited to reflect a $30,000 unrealized holding gain ($120,000 fair value at 12/31/Year 3 & $90,000 fair value at 12/31/Year 2).

Answer (D) is correct. The existence of an equity account with a debit balance signifies that the available-for-sale securities are reported at fair value that is less than historical cost. The difference is the net unrealized loss balance. Hence, historical cost must have been $116,250 ($96,450 available-for-sale securities at fair value + $19,800 net unrealized loss).