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Inter. Acct Chapter_12_solutions

Inter. Acct Chapter_12_solutions - QUESTIONS FOR REVIEW OF...

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Question 12-1 Investment securities are classified as “held-to-maturity,” “trading,” or “available-for-sale” securities.” Question 12-2 Increases and decreases in the market value between the time a debt security is acquired and the day it matures to a prearranged maturity value are ignored for securities classified as “held- to-maturity.” These changes aren’t important if sale before maturity isn’t an alternative, which is the case if an investor has the “positive intent and ability” to hold the securities to maturity. Question 12-3 SFAS No. 157 governs determination of fair value. That Standard distinguishes between three levels of inputs to fair value determination, with level 1 being readily observable fair values (for example, from a securities exchange), level 2 inputs are other observable amounts (for example, quoted values for similar items, or important inputs like interest rates), and level 3 inputs are unobservable, like the company’s own assumptions. SFAS No. 157 requires disclosure of the amount of fair values based on each of these three classes of inputs. Question 12-4 For investments to be held for an unspecified period of time , fair value information is more relevant than for investments to be held to maturity. Changes in fair values are less relevant if the investment is to be held to maturity because sale at that fair value is not an option. The investor receives the same contracted interest payments for the period held to maturity and the stated principal at maturity, regardless of movements in market values. However, when the investment is of unspecified length, changes in fair values indicate management’s success in deciding when to acquire the investment and when to sell it, as well as the propriety of investing in fixed-rate or variable-rate securities and long-term or short-term securities. QUESTIONS FOR REVIEW OF KEY TOPICS
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Answers to Questions (continued) Question 12-5 The way unrealized holding gains and losses are reported in the financial statements depends on whether the investments are classified as “securities available-for-sale” or as “trading securities.” Securities available-for-sale are reported at fair value, and resulting holding gains and losses are not included in the determination of income for the period. Rather, they are reported as a separate component of shareholders’ equity , as part of Other comprehensive income. (Available-for-sale securities for which the investor has chosen the fair value option are reclassified as trading securities.) Question 12-6 Comprehensive income is a more expansive view of the change in shareholders’ equity than traditional net income. It encompasses all changes in equity from nonowner transactions. The non-income part of comprehensive income is called “Other comprehensive income.” Other comprehensive income includes net unrealized holding gains (losses) on investments .
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