Premium Essay

Financial 3(a) Passmaster Questions

In: Business and Management

Submitted By Chloe23
Words 442
Pages 2
Marketable Securities

CPA-00263

Type1 M/C

A-D

Corr Ans: B

PM#1

F 3-01

1. CPA-00263

FARE R96 #6

Page 3

When the fair value of an investment in debt securities exceeds its amortized cost, how should each of

the following debt securities be reported at the end of the year?

Debt securities classified as

Held-to-maturity Available-for-sale

a.

Amortized cost

Amortized cost

b.

Amortized cost

Fair value

c.

Fair value

Fair value

d.

Fair value

Amortized cost

CPA-00263 Explanation

Choice "b" is correct. According to SFAS 115, debt securities (bonds) classified as held-to-maturity are

reported at amortized cost (that is, cost adjusted for amortization of premium or discount; approaches

face value). Debt securities classified as available-for-sale are reported at fair value. Note that SFAS

130 changes the treatment of unrealized holding gains and losses from available-for-sale securities.

Such gain/loss is excluded from earnings (per SFAS 115), however, per SFAS 130, it is reported as a

component of accumulated other comprehensive income.

Choice "a" is incorrect. While amortized cost is the appropriate treatment for debt securities classified as

held-to-maturity, this is not the correct treatment for securities classified as available-for-sale. Choice "c" is incorrect. Fair value is not the appropriate treatment for debt securities classified as held-to-

maturity.

Choice "d" is incorrect. Fair value is not the appropriate treatment for debt securities classified as held-to-

maturity. Nor is amortized cost the appropriate treatment for debt securities classified as available-for-

sale.

CPA-00266

Type1 M/C

A-D

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