2.0 Select Balance Sheet Accounts FAR Practice Quiz

• A. A short-term, highly liquid investment readily convertible to a known cash amount with an original maturity of three months or less from the date of purchase, presenting insignificant risk of value changes
• B. Any investment held in a money market account, regardless of maturity or withdrawal restrictions
• C. Any debt security with remaining maturity of three months or less at the balance sheet date, regardless of when purchased
• D. Any short-term available-for-sale security with fair value close to amortized cost

ASC 305-10-20 defines cash equivalents as short-term, highly liquid investments that are (1) readily convertible to known amounts of cash and (2) so near their maturity that they present insignificant risk of value changes. The operative criterion is an original maturity of three months or less from the date of purchase. Examples include 90-day Treasury bills, commercial paper with ≤90-day maturities, and qualifying money market funds.

• A. Short-term investment, commercial paper is never classified as a cash equivalent
• B. Long-term investment, all commercial paper is a long-term holding
• C. Cash equivalent, the 60-day original maturity at purchase is within the three-month threshold, qualifying it as a cash equivalent
• D. Trading security, all short-term debt instruments are classified as trading securities under ASC 320

The 60-day original maturity from the purchase date (December 1) falls within the 3-month (~90-day) threshold. The instrument is (1) short-term and highly liquid; (2) readily convertible to a known cash amount; and (3) purchased with original maturity ≤3 months, satisfying the ASC 305 cash equivalent definition. Classification is determined at purchase and does not change as the instrument approaches maturity.

• A. Step 1: Compare fair value to book value, if fair value < book value, impairment exists; Step 2: Write down to fair value
• B. Step 1: Compare book value to replacement cost, if replacement cost < book value, write down to replacement cost
• C. Step 1 (Recoverability test): Compare carrying value to the sum of undiscounted future cash flows, if carrying value exceeds undiscounted cash flows, impairment is indicated; Step 2 (Measurement): Impairment loss = carrying value minus fair value
• D. Step 1: Assess whether market capitalization has declined, if so, impairment assumed; Step 2: Write down by the market cap decline percentage

Market capitalization decline is a potential triggering event suggesting impairment testing may be needed, but it is not the impairment test itself.

• A. Unrealized gain of $14,000 recognized in net income, ($47 − $40) × 2,000 shares = $14,000 increase in fair value reported as investment income
• B. No income statement effect, the gain is reported in OCI until shares are sold
• C. Dividend income of $14,000, fair value increases are treated as constructive dividends
• D. The shares are written up to $94,000 and the $14,000 is credited to additional paid-in capital

Under ASC 321, the $7 per share fair value increase ($47 − $40) on 2,000 shares produces a $14,000 unrealized gain that is recognized in net income in the current period. The investment account is marked up from $80,000 to $94,000 (2,000 × $47), and a $14,000 gain is recorded. This gain is presented as a separate line item in net income, often labeled 'Unrealized gain (loss) on equity securities.' No OCI treatment applies.

• A. At the lower of cost or market at each reporting date, applied the same as inventory
• B. At amortized cost, the same as held-to-maturity debt securities
• C. At fair value through net income, the measurement alternative does not exist; all equity securities use full fair value
• D. At cost minus impairment, plus or minus adjustments for observable price changes in orderly transactions for identical or similar investments of the same issuer (the measurement alternative under ASC 321)

ASC 321-10-35-2 provides a measurement alternative for equity securities without readily determinable fair values: the investment is measured at cost, adjusted for: (1) downward adjustments for impairment (qualitative assessment triggers); (2) upward or downward adjustments based on observable price changes in orderly transactions for identical or similar investments of the same issuer (e.g., a subsequent financing round for a private company). All impairments and observable price adjustments are recognized in net income. This alternative avoids the costly process of estimating fair value each period for private company investments.

• A. Cash equivalent, only 61 days remain at year-end, within the 3-month threshold
• B. Long-term investment, CDs are always classified as long-term
• C. Short-term investment, the CD was purchased with a 180-day original maturity exceeding 3 months; it does not qualify as a cash equivalent regardless of remaining days at year-end
• D. Cash equivalent, CDs with fewer than 90 days remaining at the balance sheet date always qualify

ASC 305-10-20 defines the 3-month threshold based on original maturity from the date of purchase. This CD was purchased November 1 with a 180-day original maturity, exceeding 3 months. Therefore, it does not qualify as a cash equivalent at any point during its life. At December 31, it is classified as a short-term investment (current asset).

• A. Both amounts ($460,000 total) classified as restricted cash, all maintained bank balances are compensating balances
• B. Both amounts included in Cash and Cash Equivalents, compensating balances require only footnote disclosure, not reclassification
• C. Both excluded from Cash and Cash Equivalents and classified as non-current restricted assets
• D. The $400,000 formal compensating balance: non-current restricted cash (restriction extends 20 months); the $60,000 informal goodwill balance: remains in Cash and Cash Equivalents since it is not legally restricted

ASC 305-10-50 distinguishes formal from informal compensating balances: (1) Formal, legally binding agreements restrict use. The $400,000 cannot be used for other purposes; the 20-month duration makes it a non-current restricted asset; (2) Informal, merely requested by the bank without legal enforcement. The $60,000 remains at the company's full disposal and stays in Cash and Cash Equivalents. Footnote disclosure of both arrangements is required.

• A. Net income: gain of $20,000 (proceeds minus fair value); AOCI: unchanged since the fair value equaled proceeds
• B. Net income: gain of $20,000 (proceeds minus amortized cost); AOCI: $20,000 reclassified out (to zero), the previously deferred OCI gain is recognized in earnings upon sale
• C. Net income: no effect, AFS security gains are always reported only in OCI even when sold
• D. Net income: gain of $20,000; AOCI: increased by $20,000, gains accumulate in both income and OCI

When an AFS debt security is sold, two things happen simultaneously: (1) Realized gain recognized in net income = Proceeds − Amortized cost = $180,000 − $160,000 = $20,000; (2) The cumulative $20,000 unrealized gain is reclassified from AOCI to net income (a reclassification adjustment). The AOCI balance returns to zero for this security. The $20,000 appears in net income only once, as the realized gain. The reclassification moves the same $20,000 from OCI to net income, netting to $20,000 total impact.