Acct Ch 12

Bonds typically provide two sources of cash flows to investors. These are associated with the payment of

Interest and Principal

The premium on bond investment

increases the carrying value of the bond to its cost at date of purchase

The primary reasons why holding gains and losses relating to held-to-maturity securities are not recognized even though they are recognized for trading and AFS securities probably is that the information is

less relevant

Interest revenue is calculated based on the _________ interest rate. (Enter only one word.)

market or effective

The price of a bond is equal to the

present value of future cash receipts.

Holding bonds during periods in which the fair value of the bonds changes results in

unrealized holding gains and losses

At the time of acquisition, debt investments are recorded at

cost

On December 31, of the current year, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and a carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and December 31. The effective interest revenue recognized for the six months ended December 31, 2018 is:

$2,850

Select all that apply Marian Company's records show the following account balances at February 1: Investment in HTM securities, $500,000; and 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.)

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

Palmer Company purchases bonds with a face amount of $500,000 for $480,000 and properly classifies them as "held-to-maturity." On the maturity date of the bonds, the book value of bonds will be:

$500,000

Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is

3%

Select all that apply Which of the following are correct regarding the financial statement presentation of HTM securities? (Select all that apply.)

Gains and losses are shown in net income in the period in which the securities are sold. Unrealized holding gains and losses are disclosed in the notes to the financial statements.

If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using ________ ___________ techniques.

Present Value

Greenly Company acquired $40,000 face amount bonds of Neumann Company. Greenly can expect to receive the following cash flows from its investment. (Select all that apply.)

Principal and interest

Investments that are properly classified as held-to-maturity should be carried at

amortized cost

The "discount on bond investments" account is a

contra asset account

Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. The journal entry to record the interest for the first 6-month period includes (Select all that apply.)

debit cash $3,000 credit interest revenue $2,750 credit premium on bond investment $250

Lucky Company invested in debt securities and classified them as HTM. At the end of the accounting period, the value of the investment appreciated by $10,500. The company should

disclose the fair market value in the notes

Interest received is calculated based on the _______ interest rate. (Enter only one word)

face or stated

Debt securities that are classified as available-for-sale or trading are valued at

fair market value

Equity and debt securities are commonly referred to as _____________ instruments. (Enter only one word.)

financial or financing

The price of a bond is equal to

present value of future interest payments plus present value of principal

Holding gains and losses associated with investments properly classified as "trading securities" are

recognized as part of income

Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as ______ securities.

trading

Select all that apply Marian Company's records show the following account balances at February 1: Investment in HTM securities, $500,000; and 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.)

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

Which of the following is the most important concept or principle that explains the differences in reporting holding gains and losses?

Relevance

Marlon Company recognizes interest revenue of $5,400 related to its bonds; its periodic bond interest payment receipts are $5,200. The bonds must have issued at:

a discount

On December 31, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and a carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and December 31. The journal entry to record the interest payment on December 31, includes (Select all that apply.)

debit cash $2,500 credit interest revenue $2,850 debit discount on bond investment $350

For held-to-maturity debt instruments, the difference between fair value and amortized cost must be __________ in a ____________ to the financial statements.

disclosed, notes

If a bond sells for less than its maturity value, the bond sells at a ___________.

discount

For discounted bonds, interest revenue is ______ cash interest each interest period.

greater than

Greene Corporation does not recognize unrealized holding gains and losses for its bond investments. If the company is properly applying U.S. GAAP, its investment must be classified as

held-to-maturity

If an investor has the positive intent and ability to hold a debt security until it matures, it should be classified as a(n)

held-to-maturity security

During the current period, Muenster Company amortized $5,000 of discount relating to its investment in debt securities. The company's amortization next period should be ______ the current period.

higher than

Investors use this interest rate to value investments in bonds:

market interest rate

If the interest rate paid on a bond exceeds the market interest rate, the bond will sell for an amount that is

more than its maturity value

Holding gains and losses associated with investments properly classified as held-to-maturity are

not recognized

Which of the following statements regarding the initial recognition of debt investments is correct?

All debt investments are initially recorded at cost.

Cash flows from buying and selling held-to-maturity securities are typically classified as ______ activities on the Statement of Cash Flows.

Investing

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?" (Select all that apply.)

The investor has the ability to hold the security until maturity. The investor intends to hold the security until maturity.

Greene Company purchases an investment in bonds issued by Blue Company. Greene intends to hold the bonds until they mature and did not elect the fair value option. Greene should report the investment at

amortized cost

If the market rate of interest rises after a bond is purchased, the bond incurs

an unrealized holding loss

An investment in trading debt securities is initially recorded at

cost

An investor who purchased corporate bonds that are not publicly traded may estimate the bonds' fair value by determining the

present value of the 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:

$3,000 $100,000 * (6% * 6/12)

The interest rate for debt of similar risk and maturity is referred to as the Blank______ interest rate.

market