4, 7, 8, 9, 10, 11, 21 2, 10 4 1, 2, 3, 4, 7 1, 2, 3 3, 4, 5 1, 2, 3 1, 2, 3, 5 Concepts for Analysis 4, 7 1, 7 4 1, 4 1, 4 2. Debt securities identified as available-for-sale should be classified as current or noncurrent, based on maturities and expectations as to sales and redemptions in the following year. 16, 17, 18, 19, 20 7 12, 13, 16, 17 8 5, 6 9 10 10, 12 8, 9 5, 9, 10, 11, 12 4. Held-to-maturity securities generally should be classified as current or noncurrent, based on the maturity date of the individual securities.
This feature is referred to as net settlement and serves to reduce the transaction costs associated with derivatives. The purpose of a fair value hedge is to offset the exposure to changes in the fair value of a recognized asset or liability or of an unrecognized firm commitment. The unrealized holding gain or loss on available-for-sale securities should be reported as income when this security is designated as a hedged item in a qualifying fair value hedge.
If the hedge meets the special hedge accounting criteria (designation, documentation, and effectiveness), the unrealized holding gain or losses is reported as income. This is likely a setting where the company is hedging the fair value of a fixed-rate debt obligation.
CHAPTER 17 Investments ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Equity securities identified as available-for-sale should be classified as current if these securities are available for use in current operations. Reclassification adjustments are necessary to insure that double counting does not result when realized gains or losses are reported as part of net income but also are shown as part of other comprehensive income in the current period or in previous periods. When a security is transferred from one category to another, the transfer should be recorded at fair value, which in this case becomes the new basis for the security.
Questions Brief Exercises Exercises Problems Debt securities. Any unrealized gain or loss at the date of the transfer increases or decreases stockholders’ equity.
The amount of the writedown is accounted for as a realized loss. An underlying is a special interest rate, security price, commodity price, index of prices or rates, or other market-related variable.
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Changes in the underlying determine changes in the value of the derivative. Change in stock price (underlying) times number of shares (notional amount). Receive cash equivalent, based on changes in stock price times the number of shares.
Convertible debt securities and redeemable preferred stocks are not treated as equity securities. The variety in bond features along with the variability in interest rates permits investors to shop for exactly the investment that satisfies their risk, yield, and marketability desires, and permits issuers to create a debt instrument best suited to their needs. Cost includes the total consideration to acquire the investment, including brokerage fees and other costs incidental to the purchase. The three types of classifications are: Held-to-maturity: Debt securities that the enterprise has the positive intent and ability to hold to maturity.
It also includes rights to acquire or dispose of an ownership interest at an agreed-upon or determinable price such as warrants, rights, and call options or put options.
17 17-2 ASSIGNMENT CHARACTERISTICS TABLE (Continued) Item Description Level of Difficulty Time (minutes) *P17-16 *P17-17 *P17-18 Fair value hedge interest rate swap. Available-for-sale: Debt securities not classified as held-to-maturity or trading securities. A debt security should be classified as held-to-maturity only if the company has both: (1) the positive intent and (2) the ability to hold those securities to maturity. Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income.
Moderate Moderate Moderate 30–40 25–35 25–35 Issues raised about investment securities. Trading: Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences.