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Available-for-Sale (AFS) Securities quiz

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  • How are Available-for-Sale (AFS) securities initially recorded on the books?
    AFS securities are initially recorded at cost, which is the total amount paid to acquire them.
  • Where are unrealized gains or losses from AFS securities reported?
    Unrealized gains or losses from AFS securities are reported in Other Comprehensive Income (OCI), not the income statement.
  • How are dividends received from AFS securities treated in the financial statements?
    Dividends received from AFS securities are recognized as dividend revenue in the income statement.
  • What is the main difference between AFS and trading securities regarding unrealized gains and losses?
    The main difference is that unrealized gains and losses for AFS securities go to OCI, while for trading securities they go to the income statement.
  • How do you record the purchase of AFS securities in a journal entry?
    You debit the investment in AFS securities account and credit cash for the total purchase amount.
  • When the fair value of AFS securities decreases, what is the journal entry?
    Credit the investment in AFS securities for the decrease and debit unrealized loss—OCI for the same amount.
  • If the fair value of AFS securities increases, how is this reflected in the accounts?
    Debit the investment in AFS securities for the increase and credit unrealized gain—OCI for the same amount.
  • How are realized gains or losses from the sale of AFS securities reported?
    Realized gains or losses from the sale of AFS securities are reported in the income statement.
  • What must be done with the OCI balance related to an AFS security when it is sold?
    The OCI balance related to the investment must be cleared (removed) when the AFS security is sold.
  • How do you calculate the unrealized gain or loss for AFS securities at year-end?
    Subtract the previous fair value from the current fair value and multiply by the number of shares held.
  • Where does the dividend revenue from AFS securities appear on the income statement?
    It appears as non-operating income, typically in the lower section of the income statement.
  • What happens to the equity section of the balance sheet when there is an unrealized loss on AFS securities?
    An unrealized loss on AFS securities decreases equity through a reduction in OCI.
  • How are AFS securities classified on the balance sheet?
    AFS securities can be classified as either current or long-term assets, depending on management's intent.
  • What is the effect on assets and equity when a company receives dividends from AFS securities?
    Assets increase by the amount of cash received, and equity increases through the recognition of dividend revenue.
  • What is the purpose of the comprehensive income statement in relation to AFS securities?
    The comprehensive income statement includes unrealized gains or losses from AFS securities, which are not included in net income but affect equity through OCI.