302 Ch. 17 LO 1&2

The Unrealized Holding Gain/Loss—Income account for equity securities is reported as a part of other comprehensive income.

F

Securities which could be classified as held-to-maturity are a. redeemable preferred stock. b. warrants. c. municipal bonds. d. treasury stock.

C

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

When a company has acquired a "passive interest" in another corporation, the acquiring company should account for the investment a. by using the equity method. b. by using the fair value method. c. by using the effective interest method. d. by consolidation.

B

In accounting for investments in debt securities, a. a discount is reported separately. b. a premium is reported separately. c. any discount or premium is amortized. d. None of these answers are correct.

C

Investments in debt securities are generally recorded at a. cost including accrued interest. b. maturity value. c. cost including brokerage and other fees. d. maturity value with a separate discount or premium account.

C

Kramer Company's equity securities portfolio which is appropriately included in current assets is as follows: December 31, 2018 Fair Unrealized Cost Value Gain (Loss) Catlett Corp. $260,000 $215,000 $(45,000) Lyman, Inc. 245,000 265,000 20,000 $505,000 $480,000 $(25,000) Ignoring income taxes, what amount should be reported as a charge against income in Kramer's 2018 income statement if 2018 is Kramer's first year of operation? a. $0. b. $20,000 gain. c. $25,000 loss. d. $45,000 loss.

C

A company can classify a debt security as held-to-maturity if it has the positive intent to hold the securities to maturity.

F

Kern Company purchased bonds with a face amount of $1,000,000 between interest payment dates. Kern purchased the bonds at 102, paid brokerage costs of $15,000, and paid accrued interest for three months of $25,000. The amount to record as the cost of this long-term investment in bonds is a. $1,060,000. b. $1,035,000. c. $1,020,000. d. $1,000,000.

B

Held-to-maturity securities are reported at a. acquisition cost. b. acquisition cost plus amortization of a discount. c. acquisition cost plus interest. d. fair value.

B

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 a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

C

Unrealized holding gains or losses which are recognized in income are from debt securities classified as a. held-to-maturity. b. available-for-sale. c. trading. d. None of these answers are correct.

C

Which of the following is not a debt security? a. Convertible bonds b. Commercial paper c. Loans receivable d. All of these are debt securities.

C

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

Debt securities include corporate bonds and convertible debt, but not U.S. government securities.

F

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

Debt securities that are accounted for at amortized cost, not fair value, are a. held-to-maturity debt securities. b. trading debt securities. c. available-for-sale debt securities. d. never-sell debt securities.

A

During 2017, Woods Company purchased 80,000 shares of Holmes Corporation common stock for $1,260,000 as an equity investment. The fair value of these shares was $1,200,000 at December 31, 2017. Woods sold all of the Holmes stock for $17 per share on December 3, 2018, incurring $56,000 in brokerage commissions. Woods Company should report a realized gain on the sale of stock in 2018 of a. $44,000. b. $100,000. c. $104,000. d. $160,000.

A

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are a. securities where a company has holdings of less than 20%. b. securities where a company has holdings of more than 20%. c securities where a company has holdings of between 20% and 50%. d. securities where a company has holdings of more than 50%.

A

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At December 31, 2018, the fair value of the Ritter, Inc. bonds was $3,180,000. What should Landis Company report as other comprehensive income and as a separate component of stockholders' equity? a. $76,860. b. $55,260. c. $21,600. d. No entry should be made.

A

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the straight-line method, what is the amount of premium amortization that would be recognized in 2019 related to these bonds? a. $3,209 b. $2,110 c. $2,300 d. $2,510

A

On November 1, 2018, Horton Company purchased Lopez, Inc., 10-year, 9%, bonds with a face value of $800,000, for $720,000. An additional $24,000 was paid for the accrued interest. Interest is payable semiannually on January 1 and July 1. The bonds mature on July 1, 2025. Horton uses the straight-line method of amortization. Ignoring income taxes, the amount reported in Horton's 2018 income statement as a result of Horton's available-for-sale investment in Lopez was a. $14,000. b. $13,333. c. $12,000. d. $10,667.

A

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 The amount of unrealized loss to appear as a component of comprehensive income for the year ending December 31, 2018 is a. $40,000. b. $30,000. c. $20,000. d. $0.

A

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 a. 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. b. notify the issuer and request that a special payment be made for the appropriate portion of the interest period. c. make an adjusting entry to debit Interest Receivable and to credit Interest Revenue for the total amount of interest to be received at the next interest receipt date. d. do nothing special and ignore the fact that the accounting period does not coincide with the bond's interest period.

A

A correct valuation for debt securities is a. available-for-sale at amortized cost. b. held-to-maturity at amortized cost. c. held-to-maturity at fair value. d. None of these answers are correct.

B

At December 31, 2018, Atlanta Company has an equity portfolio valued at $160,000. Its cost was $132,000. If the Securities Fair Value Adjustment has a debit balance of $8,000, which of the following journal entries is required at December 31, 2018? a. Fair Value Adjustment 28,000 Unrealized Holding Gain or Loss-Income 28,000 b. Fair Value Adjustment 20,000 Unrealized Holding Gain or Loss-Income 20,000 c. Unrealized Holding Gain or Loss-Income 28,000 Fair Value Adjustment 28,000 d. Unrealized Holding Gain or Loss-Income 20,000 Fair Value Adjustment 20,000

B

At the end of 2018, Hauke Company purchased 6,000, $1,000, 9% bonds. The carrying value of the bonds at December 31, 2018 was $5,880,000. The bonds mature on March 1, 2023, and pay interest on March 1 and September 1. Hauke sells 3,000 bonds on September 1, 2019, for $2,964,000, after the interest has been received. Hauke uses straight-line amortization. The gain on the sale is a. $0. b. $14,400. c. $24,000. d. $33,600.

B

Instrument Corporation has the following investment which was held throughout 2018-2019: Fair Value Cost 12/31/18 12/31/19 Equity investment $900,000 $1,200,000 $1,140,000 What amount of gain or loss would Instrument Corporation report in its income statement for the year ended December 31, 2019 related to its investment? a. $60,000 gain. b. $60,000 loss. c. $300,000 gain. d. $240,000 gain.

B

On October 1, 2018, Menke Company purchased to hold to maturity, 500, $1,000, 9% bonds for $520,000. An additional $15,000 was paid for accrued interest. Interest is paid semiannually on December 1 and June 1 and the bonds mature on December 1, 2022. Menke uses straight-line amortization. Ignoring income taxes, the amount reported in Menke's 2018 income statement from this investment should be a. $11,250. b. $10,050. c. $12,450. d. $13,650.

B

On October 1, 2018, Renfro Company purchased to hold to maturity, 4,000, $1,000, 9% bonds for $3,960,000 which includes $60,000 accrued interest. The bonds, which mature on February 1, 2027, pay interest semiannually on February 1 and August 1. Renfro uses the straight-line method of amortization. The bonds should be reported in the December 31, 2018 balance sheet at a carrying value of a. $3,900,000. b. $3,903,000. c. $3,960,000. d. $3,961,750.

B

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 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? a. $40,000. b. $30,000. c. $20,000. d. $0.

B

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. For the year ended December 31, 2018, Patton Company should report interest revenue from the Scott Company bonds of: a. $158,970. b. $155,283. c. $155,130. d. $150,000.

B

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. 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

Use of the effective-interest method in amortizing bond premiums and discounts results in a. a greater amount of interest income over the life of the bond issue than would result from use of the straight-line method. b. a varying amount being recorded as interest income from period to period. c. a variable rate of return on the book value of the investment. d. a smaller amount of interest income over the life of the bond issue than would result from use of the straight-line method.

B

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the a. effective-interest method of allocation must be used. b. straight-line method of allocation must be used. c. effective-interest method of allocation should be used but other methods can be applied if there is no material difference in the results obtained. d. par value method must be used and therefore no allocation is necessary.

C

Investments in debt securities should be recorded on the date of acquisition at a. lower of cost or market. b. market value. c. market value plus brokerage fees and other costs incident to the purchase. d. face value plus brokerage fees and other costs incident to the purchase.

C

Landis Company purchased $3,000,000 of 8%, 5-year bonds from Ritter, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $3,124,740 at an effective interest rate of 7%. Using the effective-interest method, Landis Company decreased the Available-for-Sale Debt Securities account for the Ritter, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $10,620 and $10,980, respectively. At April 1, 2019, Landis Company sold the Ritter bonds for $3,090,000. After accruing for interest, the carrying value of the Ritter bonds on April 1, 2019 was $3,097,440. Assuming Landis Company has a portfolio of Available-for-Sale Debt Securities, what should Landis Company report as a gain or loss on the bonds? a. ($88,110). b. ($65,610). c. ($7,440). d. $ 0.

C

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

On November 1, 2018, Howell Company purchased 1,000 of the $1,000 face value, 9% bonds of Ramsey, Incorporated, for $1,052,500, which includes accrued interest of $15,000. The bonds, which mature on January 1, 2023, pay interest semiannually on March 1 and September 1. Assuming that Howell uses the straight-line method of amortization and that the bonds are appropriately classified as available-for-sale, the net carrying value of the bonds should be shown on Howell's December 31, 2018, balance sheet at a. $1,000,000. b. $1,037,500. c. $1,036,000. d. $1,052,500.

C

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.

C

When investments in debt securities are sold between interest payment dates, preferably the a. securities account should include accrued interest. b. accrued interest is credited to Interest Expense. c. accrued interest is credited to Interest Revenue. d. accrued interest is debited to Interest Receivable.

C

A requirement for a security to be classified as held-to-maturity is a. ability to hold the security to maturity. b. positive intent. c. the security must be a debt security. d. All of these are required.

D

During 2018 Logic Company purchased 10,000 shares of Midi, Inc. for $30 per share. During the year Logic Company sold 2,500 shares of Midi, Inc. for $35 per share. At December 31, 2018 the market price of Midi, Inc.'s stock was $28 per share. What is the total amount of unrealized gain/(loss) that Logic Company will report in its income statement for the year ended December 31, 2018 related to its investment in Midi, Inc. stock? a. ($20,000) b. $12,500 c. ($7,500) d. ($2,500)

D

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 a. 10 periods and 10% from the present value of 1 table. b. 10 periods and 8% from the present value of 1 table. c. 20 periods and 5% from the present value of 1 table. d. 20 periods and 4% from the present value of 1 table.

D

On January 3, 2017, Moss Company acquires $500,000 of Adam Company's 10-year, 10% bonds at a price of $532,090 to yield 9%. Interest is payable each December 31. The bonds are classified as held-to-maturity. Assuming that Moss Company uses the effective-interest method, what is the amount of interest revenue that would be recognized in 2018 related to these bonds? a. $50,000 b. $53,208 c. $47,890 d. $47,698

D

On its December 31, 2017, balance sheet, Trump Company reported its investment in equity securities, which had cost $600,000, at fair value of $560,000. At December 31, 2018, the fair value of the securities was $585,000. What should Trump report on its 2018 income statement as a result of the increase in fair value of the investments in 2018? a. $0. b. Unrealized loss of $15,000. c. Realized gain of $25,000. d. Unrealized gain of $25,000.

D

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. 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

Richman Company purchased $1,200,000 of 8%, 5-year bonds from Carlin, Inc. on January 1, 2018, with interest payable on July 1 and January 1. The bonds sold for $1,249,896 at an effective interest rate of 7%. Using the effective interest method, Richman Company decreased the Available-for-Sale Debt Securities account for the Carlin, Inc. bonds on July 1, 2018 and December 31, 2018 by the amortized premiums of $4,248 and $4,392, respectively. At December 31, 2018, the fair value of the Carlin, Inc. bonds was $1,272,000. What should Richman Company report as other comprehensive income and as a separate component of stockholders' equity? a. $0 b. $8,640 c. $22,104 d. $30,744

D

Which of the following is correct about the effective-interest method of amortization? a. The effective-interest method applied to investments in debt securities is different from that applied to bonds payable. b. Amortization of a discount decreases from period to period. c. Amortization of a premium decreases from period to period. d. It must be used to amortize a discount or premium unless some other method yields a similar result.

D

Which of the following is not correct in regard to trading securities? a. They are held with the intention of selling them in a short period of time. b. Unrealized holding gains and losses are reported as part of net income. c. Any discount or premium is amortized. d. All of these choices are correct.

D

Equity security holdings between 20 and 50 percent indicates that the investor has a controlling interest over the investee.

F

The Fair Value Adjustment account has a normal credit balance.

F

Unrealized holding gains and losses are recognized in net income for available-for-sale debt securities.

F

Companies do not report changes in the fair value of available-for-sale debt securities as income until the security is sold.

T

Companies report trading securities at fair value, with unrealized holding gains and losses reported in net income.

T

Trading securities are securities bought and held primarily for sale in the near term to generate income on short-term price differences.

T