CH 12-Debt Investments

If a bond sells for less than its maturity value, the bond sells at a [blank]

Discount

Gains and losses relating to debt securities classified as trading are presented in the [blank][blank] in the periods in which fair value changes, regardless of whether they are realized or unrealized.

Income Statement

If a bond sells for more than its maturity value, the bond sells at a [blank}

Premium

Bonds typically provide two sources of cash flows to investors. These are assocaited with the payment of - a. Interest b. Dividends c. Principal d. Taxes

a-Interest & c-Principal

Greenly Company acquierd $40,000 face amount bonds of Neumann Company. Green can expect to receive the following cash flows from its investment. (select all that apply) a. Interest b. Dividends c. Principal

a. interest c. principal

Bonds typically provide two sources of cash flows to investors. These are associated with the payment of ______ and ______. a. interest b. taxes c. dividends d. principal

a. interest & d. principal

a.Holding gain or loss in OCI b.Holding gain or loss in income c.No holding gain or loss recognized

a. investment in available-for-sale debt securities. b. Investment in trading debt securities c. Investment in held-to-maturity debt securities.

Which of the following statements regarding the initial recognition of debt investments is correct? a. All debt investments are initally recorded at the face amount. b. All debt investments are initially recorded at cost. c. All debt investments are initially recorded at value of future cash flows.

b. All debt investments are initially recorded at cost.

Trading securities typically are classified in the balance sheet as a. noncurrent assets b. current assets c. other assets

b. current assets

Credit losses are calculated as the difference between the amortized cost of debt and: a. the present value of future cash flows expected to be collected. b. the market value of the debt. c. the principal and interest still due on the debt instrument

a. the present value of future cash flows expected to be collected.

Accounting for HTM, trading, and AFS debt securities differs with respect to a. the year-end FVA b. interest earned on the investment c. the initial investment

a. the year-end FVA

Losses arising from credit losses on AFS debt securities are recognized in [blank]; noncredit losses are recognized in [blank] a. OCI:OCI b. OCI:Net Income c. Net Income: OCI d. Net Income; Net Income

c. Net Income; OCI

Investors use this interest rate to value investment in bonds. a. face interest rate b. stated interest rate c. market interest rate

c. market interest rate

An investor who purchased corporate bonds that are not publically traded may estimate the bond's fair value by determing the a. an appraised value. b. expected future earnings potential of the investee. c. present value of the future cash flows. d. original cost of the investment

c. present value of future cash flows.

Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. Margot should recognize the following interest received for the first 6-month period. a. $2,750 b. $6,000 c. $5,500 d. $3,000

d. $3,000 Rationale: $100,000 x (6%x6/12)

Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The rate used to determine interest revenue for the first 6 months is a. 3.5% b. 7% c. 8% d. 4%

a. 3.5%

Which of the following are common financial instruments that are used to finance or expand a company's operations? (select all that apply) a. Preferred Stock b. Accounts Receivable c. Property, Plant, & Equipment d. Common Stock e. Corporate bonds

a. Preferred Stock d. Common Stock e. Corporate Bonds

The fair value option can be applied to: (select all that apply) a. financial assets b. shareholders' equity c. financial liabilities

a. financial assets b.financial liabilities

Markus Company sells 1,000 bonds of its debt investment in Berta Inc for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at FV of $19,000. On the date of the sale, Markus should recognize a realized gaine of [blank] in net income. a. $1,000 b. $2,000 c. $0

b. $2,000

Cash flows from buying and selling AFS debt securities are typcially shown on the Statement of Cash Flows in the [blank] activities section. a. financing b. investing c. operating

b. investing

Equity and debt securities are commonly referred to as [blank] instruments.

Financial or Financing

Under IFRS, the entire impairment of debt investments are recognized in [blank]; under US GAAP, if a portion of an impairment is due to noncredit losses, it is recorded in [blank] a. OCI;COI b. earnings;OCI c. OCI;earnings d. earnings;earnings

b. earnings; OCI

equity and debt securities are commonly referred to as [blank] instruments.

Finanicial

Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 & Northern decides to sell the bonds. The initial investment in the bonds was $700,000 & the discount on bond account has a $100,000 balance. Norther properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes (select all that apply) a. credit to FVA $80,000 b. debit to loss on trading securities-net income $20,000 c. debit to discount on bond investment $100,000 d. credit to gain on trading securities-net income $80,000 e. debit to FVA $80,000 f. debit to cash $680,000 g. credit to investment in bonds $700,000

a. Credit to FVA $80K c. Debit to discount on bond investment $100K f. Debit to cash $680K g. Credit to investment in bonds $700K

If the market rate of interest decreases after a bond is purchased, the bond incurs a. an unrealized holding gain. b. an unrealized holding loss. c. a realized gain. d. a realized loss.

a. an unrealized holding gain.

If an investor has the positive intent and ability to hold a debt security until it mature, it should be classified as a(n) a. Held-to-maturity security. b. trading security. c. available-for-sale security

a. held-to-maturity security

Which of the following are common financial instruments that are used to finance or expand a company's operations? (select all that apply) a. Preferred Stock b. Corporate Bonds c. Common Stock d. Property, plant and equipment e. A/R

a. preferred stock b. corporate bonds c. common stock

Impairments of AFS debt instruments are recognized in OCI a. to the extent that they arise from noncredit losses b. for the entire impairment amount c. to the extent of the credit losses

a. to the extent that they arise from noncredit losses.

The price of a bond is equal to: a. present value of principal minus present value of future interest payments. b. the face amount of the bond when the stated interest rate is different than the market interest rate. c. present value of future interest payments plus present value of principal.

c. present value of future interest payments plus present value of principal.

Investment in debt securities aquired principally for the purpose of selling them in the near term are classified as [blank] securities. a. Available-for-sale b. held-to-maturity c. trading

c. trading

Global Company holds a portfolio of equity securities. The company intends to sell the securities during the next accounting period. The company should classify the investment as a. current b. noncurrent c. either current or noncurrent.

a. current

The price of a bon is equal to a. present value of future interest payments plus present value of principal b. present value of principal minus present value of future interest payments. c. the face amount of the bond when the stated interest rage is different than the market interest rate.

a. present value of future interest payments plus present value of principal.

Accounting for HTM, trading and AFS debt securities is the same with respect to: (select all that apply) a. the initial investment b. year-end FVA c. interest revenue earned on investment d. the reclassificiation of unrealized holding gains & losses

a. the initial investment c. interest revenue earned on investment

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000;and a discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include debits of (select all that apply) a. $20,000 to loss. b. $20,000 to discounts. c. $20,000 to gain. d. $520,000 to cash

b. $20,000 to discounts. d. $520,000 to cash.

Marian Company's records show the following account balances at 2/1/18: Investment in HTM securities, $500,000;and a discount on HTM investment, $20,000. On that day, the company sells the investment for $520,000. The journal entry would include credits of (select all that apply) a. $480,000 to investments in HTM securities. b. $40,000 to gain from sale of investment. c. $20,000 to gain from sale of investment. d. $500,000 to investments in HTM securities. e. $20,000 to discounts.

b. $40,000 to gain from sale of investment. d. $500,000 to investments in HTM securities

Jones financial institution buys and sells debt securites frequently to maximize short-term gains in the market value. Jones should classify it's portfolio as a. Available-for-Sale securities b. Trading Securities c. Held-to-Maturtiy securities

b. trading securities

Holding bonds during periods in which the fair value of the bonds changes results in a. a change in the amount of interest received. b. unrealized holding gains and losses. c. realized gains and losses.

b. unrealized holding gains and losses

The price of a bond is equal to the a. nominal amount of future cash receipts. b. present value of future cash receipts. c. present value of interest payments.

c. present value of future cash receipts.

If the market rate of the interest rises after a bond is purchased, the bond incurs a. unrealized holding gain. b. realized loss. c. unrealized holding loss. d. a realized gain.

c. unrealized holding loss

If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is a. more than its maturity value b. less than its maturity value c. equal to its maturity value

b. less than its maturity value.

The interest rate for debt of similar risk and maturity is referred to as the [blank] interest a. stated b. market c. coupon

b. market