Question

1. How does electing the Fair Value Option under US GAAP change the reporting for investments classified as Trading Securities? Balance Sheet effect / Income Statement effect

No change/ No change

Change to fair value / Change to recognized unrealized gain & loss in OCI

Change to fair value / Change to recognized unrealized gain & loss in the Income Statement

No change / Change to recognized realized gain & loss in the Income Statement

None of the above describes the change due to electing the Fair Value Option

2. A company records an unrealized loss on short-term debt securities classified as “trading.” Unrealized losses are not tax deductible but realized losses are. This would result in what type of difference and in what type of deferred income tax?

Type of Difference                   Deferred Tax

Temporary                        Liability

Temporary                          Asset

Permanent                        Liability

Permanent                          Asset

3. The following information pertains to Garfield Co.’s defined benefit pension plan for the current year:

Fair value of plan assets 1/1               $350,000

Fair value of plan assets at 12/31        $525,000

Employer contributions                      $110,000

Benefits paid                                       $85,000

What amount was Garfiled’s actual return on plan assets?

$65,000

$175,000

$150,000

$260,000

None of the above

Answer 1

1. No Change/ No Change.

Under “fair value option”.

The investment is carried at fair value.

Unrealized gains and losses are included in income.

For trading securities, the realised and unrealised gain/losses are already reported in income statement to carry the securities at fair value, thus there would be no change if fair value option is elected for Trading securities.

2. Temporary, Deferred tax Assets.

( when the security is sold, the realised gain/loss is tax deductible, thus its a temporary difference, also since the taxes paid are more now as the unrealised losses are not deductible, it will be lead to creation of deferred tax assets provided the requirements for recognising the deferred tax assets is met by the firm)

3. Actual return for pension plan assets = Ending Balance (fair value) – Beginning balance (fair value) + Benefits – Contributions = $525000-$350000+$85000-$110000 = $ 150,000