Questions and Answers of Accounting For Investments

What is readily determinable fair value as per FAS 115?
What is the fundamental difference between the trading and availablefor-sale classifications of equity investments?
When is an investor supposed to have significant influence on the investee company, and what is the method of accounting for such investments?
Controlling interest is acquired if an investor holds more than 50 percent—is this statement true? Discuss your answer with examples.
What are the main differences between exchange-traded securities and over-the-counter securities?
Explain in brief the functions and functioning of stock exchanges.
List the various events during the trade life cycle for equity shares that are held as trading, along with the accounting entries to be recorded.
What are corporate actions and what is their impact with regards to accounting?
Commissions and other expenses for acquiring the shares are treated as part of the cost of the equity—is this true, and if so, what are the exceptions?
What are the differences between trade date accounting and settlement date accounting?
What is the reversal journal entry for mark-to-market?
Explain the process of FX revaluation and FX translation. What are the differences between the two?
What is meant by functional currency and how it is determined?
How do you distinguish between capital gains and currency gains due to fluctuation in foreign exchange rate? Is it mandatory to divulge the two gains separately?
The equity method of accounting is adopted in:a. Controlling interestb. Significant influencec. Passive investmentsd. None of the above
In trade date accounting, a liability payable for acquiring the asset will be recorded on:a. The trade dateb. The reporting datec. The settlement dated. All of the above
A broker-dealer who records the transactions on settlement date basis should compute the net capital on:a. The trade dateb. The reporting datec. The settlement dated. Any of the above
The definition of equity security as per FAS 115 does not apply to:a. Investment companiesb. Nonprofit organizationsc. Brokers and dealers in securitiesd. All of the above
The shareholder will recognize the dividend income:a. On the date of dividend declarationb. On the ex-dividend datec. At the end of accounting periodd. None of the above
A shareholder is said to have controlling interest in the company if he holds:a. Less than 20 percent shares of the investee companyb. From 20 to 50 percent shares of the investee companyc. More than
Unrealized gains or loss computed for available-for-sale (AFS)securities will be reported as:a. Income/loss on the income statementb. Other comprehensive incomec. Dividend incomed. None of the above
For private equity investment, the responsibility of fulfillment of the obligation is vested with:a. The stock exchangeb. The brokerc. The sellerd. All of the above
If the net holding of any share is negative, then it is referred to as:a. Available-for-sale (AFS)b. A long positionc. A short positiond. Trading securities
Under the incremental value method, mark-to-market entry is reversed:a. On T + 2b. At the end of the accounting periodc. On the next valuation dated. None of the above
The fair value of securities that are listed and traded through stock exchanges is determined based on:a. The highest bid price quoted on the exchange for each dayb. Market quotes at the end of each
In private equity investments where the trade is executed over-thecounter, who among the following will be the actual counterparty?a. The stock exchange in which the stock is listedb. The buyerc. The
When the net holding of any given share is shown in negative value, it refers to:a. Quantity of short positionb. Loss from long positionc. Unrealized loss from short positiond. Quantity of long
For exchange-traded securities, the delivery of the securities either in physical or in electronic form takes place:a. When the trade is bookedb. When the broker confirms the receipt of paymentc.
When a company announces a dividend, who is entitled to receive it?a. An investor listed as holder of stock as of the dividend declaration dateb. An investor listed as holder of stock as of the
If an investor buys 1,000 shares at $50 and the initial margin is 60 percent and the maintenance margin is 30 percent, he will receive the first marginal call when the stock price falls below:a.
Michael James bought 8,500 shares of NovoSotia on April 15 for $12 per share. On the same day, the closing price of NovoSotia was $11.45 per share. Calculate the unrealized gains/loss at end of day
On April 24, he sold 4,000 shares of NovoSotia at $14 per share. Pass necessary journal entries to record the sale of these shares and also the subsequent realized/unrealized gain or loss as of that
On May 31, NovoSotia declared a dividend of $1 per share with record date of April
On June 10, the payment was made. Calculate the dividend amount received by Michael James and also pass entries for dividend declaration and actual receipt of such dividend.
On June 25, Mr. James bought an additional 2,000 shares of NovoSotia at $16 per share. On July 28, he sold another 4,000 shares at $14.65 per share. Mr. James follows the last in, first out (LIFO)
Prepare realized/unrealized gains and loss account (ledger account)giving effect to the preceding transactions.
When would you classify an investment as available-for-sale (AFS)?
What are the major differences between trading and available-for-sale securities?
What is other comprehensive income (OCI) and where is it presented in the final accounts?
How is the foreign exchange translation impact on AFS equity securities handled? Is this any different from debt securities? If so, explain why it is so.
How is the impairment of AFS securities treated?
AFS securities are debt or equity investments that will be held:a. Till maturityb. For a predefined periodc. Only till the current financial yeard. For an indefinite period of timee. None of the above
The unrealized gains/losses for AFS securities are:a. Recorded as an adjustment to equity on the balance sheetb. Not recorded in the balance sheetc. Recorded as earnings in P&L for the current
When there is a permanent impairment to the value of the securities held as available-for-sale, such permanent impairment should be recognized as:a. Mark-to-marketb. Current liabilitiesc. Incomed.
For AFS securities, cost of sales is arrived at by which of the following methods?a. Weighted average methodb. FIFOc. LIFOd. All of the above methodse. None of the above methods
Dianna Smith buys 10,000 shares of GoldWinner on January 10 for $5.40 per share. Ms. Smith’s reporting currency is Japanese yen. The shares are bought without any intention of trading for
On January 12 the US$/JPY rate is 108.05. Record the FX revaluation entries for these events. Calculate the FX gain/loss and pass relevant entries for FX translation.c. The shares are sold on January
Can the securities that are classified once be transferred to other category? If so, what precautions should be taken to adjust the unrealized gains or losses?
What is the proper treatment of stock dividends? Can you report this as income?
How are the tax effects on unrealized gains/losses treated in the books of accounts in the securities classified as trading and as available-for-sale?
When securities are transferred from trading securities to available-forsale, thena. Gain/Loss recognized as unrealized should be reversedb. Gain/Loss recognized as unrealized should not be
When securities are transferred from available-for-sale to trading, thena. Unrealized gain/Loss will be transferred from OCI and treated as incomeb. Unrealized gain/Loss should not be reversedc. No
Impairment other than temporary with respect to equity securities should bea. Written down to fair valueb. Treated alike as temporary impairmentc. Considered a loss to be treated as temporaryd. None
Stock dividend declared should be treated asa. Incomeb. Increase in the value of original shares heldc. Increase to the quantity (position) of shares heldd. All of the above
For securities classified as available-for-sale, which of the following items will be reported in the income statement of the current period?a. Both realized and unrealized gainsb. Realized gain
For income tax purposes, unrealized gain/loss will be recognized for reportinga. Automatically at the end of the financial yearb. Only if the securities are liquidated and realizedc. As and when,
Unrealized gain/loss included in the income/OCI representsa. Temporary difference recognized as deferred tax benefitsb. Permanent difference recognized as deferred tax benefitsc. No effectd. None of
For available-for-sale securities, the deferred tax effect should be presented ina. The income statement itselfb. Other comprehensive income itselfc. No need for accountingd. None of the above
For trading securities, the deferred tax effect should be presented ina. The income statement itselfb. Other comprehensive income itselfc. No need for accountingd. None of the above
As per U.S. GAAP, changes in fair value for available-for-sale securities are reported ina. The income statementb. Other Comprehensive Incomec. No need to reportd. None of the above
When the equity securities are transferred from AFS to trading securities,a. The unrealized gain/loss is recognized on T + 2b. The unrealized gain/loss is not recognized at allc. The realized
Shares received as stock dividend should be added to the original shares, and when the mark-to-market process is performed, the impact of the stock dividenda. Should be treated as unrealized gains
According to the definition in FAS 109, the tax effects of all temporary differences arising from unrealized gain/loss are to be recognized in the financial statements asa. Non-trading incomeb. Items
According to FAS 115, under U.S. GAAP, for securities classified as available-for-sale, all reporting enterprises shall disclosea. Aggregate fair valueb. Gross unrealized holding gainsc. Gross
Compare and contrast a forward contract with a futures contract.
Discuss the relative merits and disadvantages of hedging, speculation, and arbitrage. Which of these is good for the economy?
What are the limitations of forward markets?
“A futures contract is more advantageous than a forward contract”. Do you agree? If so, why?
What are the essential components of a futures contract?
What is the fundamental difference between initial margin and a variation margin?
How is a futures contract settled?
What is meant by open interest? What does the movement of open interest indicate?
How is a futures contract priced?
What is meant by systematic and unsystematic risk?
Do you think that index futures are better than stock futures? If so, why?
Why does the margin call occur? What happens if the margin call is not met by the investor?
Trading in stock futures versus trading in index futures—which is more risky and why?
Futures contracts are tradeda. Over the counterb. On stock exchangesc. Through private placementd. All of the above
Forward contracts are tradeda. Over the counterb. On stock exchangesc. Through private placementd. All of the above
Which of the following products conform to strict guidelines of the stock exchange?a. Futuresb. Forwardsc. Both futures and forwardsd. None of the above
Settlement of futures happens througha. Cashb. Physical delivery of the underlying assetc. Either cash or physical deliveryd. None of the above
The marked-to-market process is followed fora. Forwards contractsb. Futures contractsc. Both (a) and (b)d. None of the above
Settlement of forward contracts happens througha. Cashb. Physical delivery of the underlying assetc. Either cash or physical deliveryd. None of the above
In a futures contract, the role of novation is played by thea. Brokerb. Stock exchangec. Buyerd. Seller
Unwinding the futures contract takes place througha. Entering into a separate agreementb. Taking an opposite positionc. Canceling the agreementd. None of the above
The intention for entering into the futures contract could bea. Hedgingb. Speculationc. Arbitrage profitd. All of the above
Advantages of futures contracts includea. Low transaction costb. Performance guaranteed by the clearinghousec. Comprehensive regulationd. All of the above
Disadvantages of futures contracts includea. Low transaction costb. Comprehensive regulationc. Liquidity issuesd. All of the above
The underlying asset in a futures contract could bea. A single stock b A group of stocksc. An index computed and published by the exchanged. All of the above
The lot size of a futures contract is managed bya. The buyer of the contractb. The seller of the contractc. The stock exchange concernedd. Any of the above
Initial margin amount is paid by thea. Buyerb. Sellerc. Both buyer and sellerd. Broker
Performance of the stock market is measured througha. FX rate fluctuationsb. Stock indexes’ movementc. A high rate of dividend declared by the investee companyd. None of the above
Purchase and sale of similar products in two or more different markets in order to take advantage of price discrepancy is calleda. Hedgingb. Speculationc. Parallel positioningd. Pyramidinge. Arbitrage
In the futures market, a margin call will be issued to the person holding the futures position to bring the account back up to the required level, whena. Margin drops below the initial margin
Stock price movements are driven partly by unsystematic risks. Which among the following falls in the category of unsystematic risks?a. The country’s economic growth opportunitiesb. Government
Usually the stock exchange manages to fix the lot size of a futures contract to help thea. Exchanges, custodian, and administratorsb. Buyers and sellers in the physical marketc. Investors, hedgers,
How well does interest rate parity seem to hold? Are there bargains to be found in other currencies? What factors might account for interest rate parity violation?? L042
Calculate the rate of return available on the foreign government security, converting the foreign currency transactions into dollars at the current and forward exchange rates.? L042
Record the spot exchange rate from the Bloomberg site and the futures exchange rate from the CME Web site for the date closest to the maturity of the investment you chose in the previous question.?
Select one of these countries and record the yield on a short-term government security from the Bloomberg Web site. Also make note of the U.S. Treasury yield on an instrument with the same (or

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