Journal Questions

Available-for-sale, Trade Currency TWD
Taiwan Opportunities Fund traded in Feng Tay Enterprises Co. Ltd., shares in the Taiwan stock exchange through KGI Securities Co., brokers, and the details are as follows:

Trade Details

Date                   Product               Quantity           Rate             B/S               Brokerage
5-Feb-X1         Feng Tay               64,000        27.30 TWD          B                5,350 TWD
15-Feb-X1       Feng Tay               30,500        26.25 TWD          B                2,850 TWD
5-Mar-X1         Feng Tay               85,700        25.85 TWD          S                4,750 TWD

Other Details
  Settlement: T + 3

Liquidation Method
  FIFO

Market Rate of Feng Tay Shares in TWD
  February 28: 26.95
  March 31: 27.90
  April 30: 30.15 

FX Rate: USD/TWD
  February 5: 32.67
  February 8: 32.63
  February 15: 32.76
  February 18: 32.79
  February 28: 32.98
  March 5: 32.83
  March 8: 32.87
  March 31: 32.90
  April 30: 32.77

Functional Currency
  USD

Prepare
Journal entries, general ledgers, trial balance, income statement, and balance sheet.

Available-for-sale, Trade Currency SGD
Singapore Fund traded in OCBC LTD shares in a Singapore Stock Exchange through Grayson & Co. brokers, and the details are as follows:

Trade Details

Date              Product          Quantity            Rate             B/S             Brokerage
 8-Feb-X1     OCBC LTD       6,000                9.30  SGD      B               558 SGD
15-Feb-X1    OCBC LTD       8,000                10.10 SGD     B               800 SGD
 9-Mar-X1     OCBC LTD     11,500                10.30 SGD     S               271 SGD

Other Details
  Settlement: T + 3

Liquidation Method
  FIFO

Market Rate of OCBC LTD Shares in SGD
  February 28: 10.15
  March 31: 9.80
  April 30: 10.35 

FX Rate: USD/SGD
  February 8: 1.54
  February 11: 1.52
  February 15: 1.51
  February 18: 1.53
  February 28: 1.52
  March 9: 1.55
  March 12: 1.53
  March 31: 1.50
  April 31: 1.54

Functional Currency
  USD

Prepare
Journal entries, general ledgers, trial balance, income statement, and balance sheet.

Available-for-sale, Functional Currency CAD
U.S. Fund traded in DSP shares in a Canadian stock exchange through Amazon brokers, and the details are as follows:

Trade Details

Date              Product               Quantity           Rate              B/S             Brokerage
18-Feb-X1      DSP                     5,000            15.15 CAD       B                50 CAD
25-Feb-X1      DSP                     8,000            16.10 CAD       B                80 CAD
19-Mar-X1      DSP                     7,500            16.30 CAD       S                75 CAD

Other Details
  Settlement: T + 3

Liquidation Method
  FIFO

Market Rate of DSP LTD Shares in CAD
  February 28: 16.15
  March 31: 16.80
  April 30: 16.35 

FX Rate: USD/CAD
  February 18: 1.0130
  February 25: 1.0185
  February 28: 1.0150
  March 19: 1.0220
  March 31: 1.0245
  April 31: 1.0190

Functional Currency
  USD

Prepare
Journal entries, general ledgers, trial balance, income statement, and balance sheet.

Available-for-Sale, Functional Currency JPY
DiAnna Smith buys 10,000 shares of GoldWinner on January 10 for $5.4 per share. Ms. Smith’s reporting currency is Japanese yen. The shares are bought without any intention of trading for short-term gains. Record the necessary journal entries for the following events:

1. For the purchase of the 10,000 shares.

2. The closing rate of GoldWinner shares on January 25 is $6.2 per share. Record the unrealized gains or loss entry.

3. The USD/JPY rate on January 10 is 109.15. The shares bought on January 10 are settled on January 12. On January 12 the USD/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.

4. The shares are sold on January 29 for $6.8 per share. Calculate the realized gain or loss and pass entry. The USD/JPY rate on liquidation is 109.24.

5. Prepare relevant ledger accounts to give effect to these transactions.

Objective Questions

1. AFS securities are debt or equity investments that will be held
a. Till maturity.
b. For a predefined period.
c. Only till the current financial year.
d. For an indefinite period of time.
e. None of the above.

2. The unrealized gains/losses for AFS securities are
a. Recorded as an adjustment to equity on the balance sheet.
b. Not recorded in the balance sheet.
c. Recorded as earnings in P&L for the current period.
d. Both a and c.

3. 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-market.
b. Current liabilities.
c. Income.
d. Accrued expense.
e. Cost.

4. For AFS securities, cost of sales is arrived at by which of the following methods?
a. Weighted average method.
b. FIFO.
c. LIFO.
d. All of the above methods.
e. None of the above methods.

Theory Questions

1. When would you classify an investment as available-for-sale?

2. What are the major differences between trading and available-for-sale securities?

3. What is other comprehensive income (OCI) and where is it presented in the final accounts?

4. 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.

5. How is the impairment of AFS securities treated?

• According to the accounting standards, available-for-sale financial assets are those nonderivative financial assets that are designated as available for sale or are not classified as loans and receivables, held-to-maturity investments, or financial assets at fair value through profit or loss.
• Available-for-sale securities are debt or equity investments that are held for an indefinite period of time without any intention to resell for profit.
• They are not trading assets, as in the case of short-term assets held for speculation, nor are they acquired with an intention to hold till maturity.
• If there is an increase in the market rate over and above the purchase rate of AFS securities, then such increase is recorded as part of the other comprehensive income (OCI) and not recognized as income in the current period. The is shown as part of the shareholders’ equity in the balance sheet.
• Any foreign exchange gains and losses on monetary assets are recognized in the statement of profit and loss except for those items that are designated as hedging instruments.
• Equity instruments being nonmonetary assets, the gain or loss including any related foreign exchange component is recognized directly in the appropriate equity account.
• In the balance sheet a nonmonetary financial asset such as an investment in equity instrument is translated using the closing rate if it is carried at fair value in the foreign currency, and using the historical rate if it is not carried at fair value when its fair value cannot be reliably measured.
• As per the U.S. GAAP Statement of Position, it is not mandatory to show separately the capital gains/loss due to change in the market rate of the asset, or currency gains/loss due to change in the foreign exchange rate, although the SOP indicates that such separate reporting would provide valuable information to the users of the financial statements.
• If an equity instrument measured at fair value with gains and losses recognized in the appropriate equity account becomes impaired, the cumulative net loss recognized in the equity account, including any portion attributable to foreign currency changes, should be recognized in the statement of profit and loss.
• If the equity securities classified as available-for-sale are sold, then the realized gains/loss on such sale is transferred from the OCI to the income statement and an entry is recorded to that effect.