Ch.17

Jordan Company purchased ten-year, 10% bonds that pay interest semiannually. The bonds are sold to yield 8%. One step in calculating the issue price of the bonds is to multiply the principal by the table value for

20 periods and 4% from the present value of 1 table

A requirement for a security to be classified as held-to-maturity is

All of these are required

Which of the following is not correct in regard to trading securities?

All of these choices are correct.

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as

Fair Value Method: Income Equity Method: A reduction of the investment

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods?

Fair Value Method: No Effect Equity Method: Decrease

Which of the following are considered equity securities? I. Convertible debt. II. Redeemable preferred stock. III. Call or put options.

III only

Which of the following is correct about the effective-interest method of amortization?

It must be used to amortize a discount or premium unless some other method yields a similar result.

Which of the following is not a debt security?

Loans receivable

Which of the following is not generally correct about recording a sale of a debt security before maturity date?

The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies?

The investor should use the equity method to account for its investment unless circum-stances indicate that it is unable to exercise "significant influence" over the investee.

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes

a debit to Debt Investments at $315,000.

Koehn Corporation accounts for its investment in the common stock of Sells Company under the equity method. Koehn Corporation should ordinarily record a cash dividend received from Sells as

a reduction of the carrying value of the investment

Use of the effective-interest method in amortizing bond premiums and discounts results in

a varying amount being recorded as interest income from period to period.

On August 1, 2018, Fowler Company acquired $500,000 face value 10% bonds of Kasnic Corporation at 104 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2023, with interest payable each October 31 and April 30. The bonds will be held to maturity. What entry should Fowler make to record the purchase of the bonds on August 1, 2018? a. Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500 b. Debt Investments 532,500 Cash 532,500 c. Debt Investments 532,500 Interest Revenue 12,500 Cash 520,000 d. Debt Investments 500,000 Premium on Bonds 32,500 Cash 532,500

a. Debt Investments 520,000 Interest Revenue 12,500 Cash 532,500

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Debt Investments. b. debit to the discount account. c. debit to Interest Revenue. d. None of these answers are correct.

a. debit to Debt Investments.

When investments in debt securities are sold between interest payment dates, preferably the

accrued interest is credited to Interest Revenue

Held-to-maturity securities are reported at

acquisition cost plus amortization of a discount.

In accounting for investments in debt securities,

any discount or premium is amortized.

Transfers between categories

are accounted for at fair value for all transfers.

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses that are included as other comprehensive income and as a separate component of stockholders' equity are

available-for-sale debt securities.

At February 1, 2019, Richman Company sold the Carlin bonds for $1,236,000. After accruing for interest, the carrying value of the Carlin bonds on February 1, 2019 was $1,240,500. Assuming Richman Company has a portfolio of available-for-sale debt investments, what should Richman Company report as a gain (or loss) on the bonds? a. $0. b. ($4,500). c. ($26,244). d. ($35,244).

b. ($4,500).

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes a. a debit to Debt Investments at $300,000. b. a credit to Premium on Debt Investments of $15,000. c. a debit to Debt Investments at $315,000. d. None of these choices are correct.

b. a credit to Premium on Debt Investments of $15,000.

On its December 31, 2017 balance sheet, Calhoun Company appropriately reported a $10,000 debit balance in its Fair Value Adjustment account. There was no change during 2018 in the composition of Calhoun's portfolio of debt investments held as available-for-sale debt securities. The following information pertains to that portfolio: Security Cost Fair value at 12/31/18 X $130,000 $160,000 Y 100,000 90,000 Z 175,000 125,000 $405,000 $375,000 89. What amount of unrealized loss on these debt securities should be included in Calhoun's stockholders' equity section of the balance sheet at December 31, 2018?

b.($405,000 - $375,000) = $30,000.

On August 1, 2018, Dambro Company acquired 1,200, $1,000, 9% bonds at 97 plus accrued interest. The bonds were dated May 1, 2018, and mature on April 30, 2024, with interest paid each October 31 and April 30. The bonds will be added to Dambro's available-for-sale portfolio. The preferred entry to record the purchase of the bonds on August 1, 2018 is a. Debt Investments 1,191,000 Cash 1,191,000 b. Debt Investments 1,164,000 Interest Receivable 27,000 Cash 1,191,000 c. Debt Investments 1,164,000 Interest Revenue 27,000 Cash 1,191,000 d. Debt Investments 1,200,000 Interest Revenue 27,000 Discount on Debt Investments 36,000 Cash 1,191,000

c. Debt Investments 1,164,000 Interest Revenue 27,000 Cash 1,191,000

Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. Accrued interest will be received by the seller even though it is not an interest payment date. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments. d. A gain or loss on the sale is reported as an other revenue or expense.

c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments.

Investments in debt securities are generally recorded at

cost including brokerage and other fees.

Patton Company purchased $1,500,000 of 10% bonds of Scott Company on January 1, 2018, paying $1,410,375. The bonds mature January 1, 2028; interest is payable each July 1 and January 1. The discount of $89,625 provides an effective yield of 11%. Patton Company uses the effective-interest method and plans to hold these bonds to maturity. 69. On July 1, 2018, Patton Company should increase its Debt Investments account for the Scott Company bonds by a. $8,970. b. $5,140. c. $4,485. d. $2,571.

d. $2,571.

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a

debit to Debt Investments.

Under the equity method of accounting for investments, an investor recognizes its share of the earnings in the period in which the

earnings are reported by the investee in its financial statements

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the

effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained.

If the parent company owns 90% of the subsidiary company's outstanding common stock, the company should generally account for the income of the subsidiary under the

equity method

Impairments are

evaluated using the CECL model similar to receivables

A correct valuation for debt securities is

held-to-maturity at amortized cost.

Debt securities that are accounted for at amortized cost, not fair value, are

held-to-maturity debt securities.

When an investment in a held-to-maturity security is transferred to an available-for-sale debt security, the carrying value assigned to the available-for-sale debt security should be

its fair value at the date of the transfer

When an investment in an available-for-sale debt security is transferred to trading because the company anticipates selling the security in the near future, the carrying value assigned to the investment upon entering it in the trading portfolio should be

its fair value at the date of the transfer

When an investor's accounting period ends on a date that does not coincide with an interest receipt date for bonds held as an investment, the investor must

make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the amount of interest accrued since the last interest receipt date.

Investments in debt securities should be recorded on the date of acquisition at

market value plus brokerage fees and other costs incident to the purchase.

Securities which could be classified as held-to-maturity are

municipal bonds.

The fair value option allows a company to

report most financial instruments at fair value at any point of time

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are

securities where a company has holdings of less than 20%.

A reclassification adjustment is reported in the

statement of comprehensive income as other comprehensive income

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

trading.