Acct 3120-Ch. 12 SB

The appropriateness of the classification of debt investments must be reassessed

each reporting date

How are equity investments that lack significant influence adjusted?

A fair value adjustment is recorded at the end of every reporting period. Unrealized holding gain or loss is included in net income.

Regarding the valuation of equity investments that lack significant influence beginning in 2018, which of the following statements is correct?

Companies are required to use the fair value through net income method.

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

Interest & principal.

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

Market

Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period,

Northern will report an unrealized holding gain in net income. Northern will make a fair value adjustment of $75,000.

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.

Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to

interest revenue earned on investment. the initial investment.

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

investing

Investors use this interest rate to value investments in bonds:

market interest rate

The price of a bond is equal to the

present value of future cash receipts.

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

principal interest

On the date of acquisition, an investment in bonds should be recorded at:

cost

James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should

credit dividend revenue

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with

debit investment in Saddle $450,000 credit cash $450,000

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 revenue for the first 6-month period:

$2,750 $110,000 x (5% x 6/12)

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?"

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

At the time of acquisition, debt investments are recorded at

cost

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2021, the investment in North Company has a fair value of $505,000. On January 1, 2022, Smith sells the investment in North Company for $505,000. What journal entry is required to record the sale?

debit cash $505,000 credit fair value adjustment $5,000 credit investment in North stock $500,000

Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as _______activities in the statement of cash flows.

operating

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

premium

Trading securities typically are classified in the balance sheet as

current assets.

The fair value option can be applied to:

financial liabilities financial assets

Equity and debt securities are commonly referred to as _____ instruments.

Financing

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

unrealized holding gains and losses

The choice to classify debt securities as current or noncurrent depends on

when they are expected to mature or be sold.

How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?

A valuation allowance account is increased or decreased.

From an accounting perspective, critical events that investors experience over the life of an investment include

changes in fair value sale of investment receiving dividends

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

current

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 a fair value of $19,000. On the date of sale, Markus should recognize a realized gain of _____ in net income.

$2,000

On December 31, 2018, 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 $95,000 x 0.03 = $2,850

Bella Company purchased debt securities with a face amount of $500,000 for $480,000 and classifies them as trading securities. During the first year, the company amortized $2,000 of the associated discount. At the end of the period, the fair value is $504,000. Bella should recognize a fair value adjustment of

$22,000

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 x (6% x 6/12)

Marian Company's records show the following account balances at 2/1/18: 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

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

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% 6%/2

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

All debt investments are initially recorded at cost.

Which of the following are common financial instruments that are used to finance or expand a company's operations?

Corporate bonds Preferred stock Common stock

Investors utilize the ____________ interest rate to value the stream of cash flows associated with bond investments.

Effective

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 a fair value of $19,000. Assume the investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed. The journal entry to record the sale of the bonds should include these credits:

Gain on sale of investment - $2,000 Investment in AFS - $18,000

Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?

Net income may otherwise appear more volatile than it actually is.

How are available-for-sale debt securities reported?

Realized gains and losses are reported in net income in the period the investment is sold. Unrealized gains and losses are reported as part of other comprehensive income when they occur.

Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct?

Von has significant influence over Neumann. Von owns 20-50% of Neumann's voting shares.

Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be

an increase in other comprehensive income.

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

an unrealized holding gain

All equity investments are initially recorded at

cost

January 1, 2021, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. How should Smith Co. record the purchase of this investment?

credit cash $500,000 debit investment in North Company $500,000

January 1, 2018, Smith Co. purchased common stock of North Company for $500,000. North Company has common stock outstanding of $10 million. Smith owns 5% of the outstanding stock of North. On December 31, 2018, North Company has $250,000 in net income and pays Smith Co. $5,000 in dividends. What should Smith Co. record on December 31, 2018?

credit dividend revenue $5,000 debit cash $5,000

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 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes

credit to investment in bonds $700,000 debit to cash $680,000 debit to discount on bond investment $100,000 credit to fair value adjustment $80,000.

Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale?

debit to discount $2,000 debit to cash $99,000 credit to fair value adjustment $1,000 credit investment in bonds $100,000

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

discount

Dividends earned on an equity investment, when there is a lack of significant influence, are credited to

dividend revenue.

Interest received is calculated based on the ______interest rate.

face

At the end of the accounting period, trading debt securities must be adjusted to _____ value.

fair

At the end of the accounting period, trading debt securities must be adjusted to _____value.

fair

Investments in debt securities classified as trading are reported on the balance sheet at

fair value

Characteristics that support classification of investments as trading securities include

frequent and active trading. motivation to realize short-term profits.

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

income statement

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

less than its maturity value.

Investors utilize the _____ interest rate to value the stream of cash flows associated with bond investments.

market

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.

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

premium

The price of a bond is equal to

present value of future interest payments plus present value of principal

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

Unrealized holding gains and losses associated with debt investments properly classified as "available for sale" are

recognized as other comprehensive income.

When fair value of equity investments is not readily determinable,

the fair value is estimated as cost, less previously recognized impairments, then adjusted based on similar equity.

Accounting for held-to-maturity, trading, and available-for-sale debt securities differs with respect to

the year-end fair value adjustment.

Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.

investing

Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in ____ _____ in the period they occur.

net income

Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in ____ _____in the period they occur.

net income

Under the fair value option, unrealized gains and losses on debt securities are

recognized in net income.

When fair value of equity investments is not readily determinable

the investor needs to continually evaluate whether fair value is readily determinable. the investor needs to assess annually whether the investment is impaired. the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments.

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

trading

Beginning in 2018, equity adjustments that lack significant influence are accounted for the same way as debt investments classified as

trading securities

Cash flows related to equity investments for which the investor lacks significant influence and are held with an intent for short-term profit are shown in the _____ section of the Statement of Cash Flows.

operating

Marian Company's records show the following account balances at 2/1/18: 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

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

Which of the following are correct regarding the financial statement presentation of HTM securities?

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

Equity investments for which the investor does not have significant influence are classified as _____ in the balance sheet.

noncurrent assets current assets

When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the

original cost of the investment.

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

present value

Identify critical events that companies experience with respect to equity investments that must be recognized in the accounting system.

purchase of investment changes in fair value receiving dividends sale of investment

Jones Financial Institution buys and sells debt securities frequently to maximize short-term gains in market value. Jones should classify its portfolio as

trading securities.

Under U.S. GAAP, which of the following statements regarding the classification of debt investments is correct?

The classification of investments must be reassessed each reporting period.