Chapter 12-Int Accounting 2
What fundamental concepts or principles supports the use of the fair value method?
Relevance
The premium on bond investment
The premium on bond investment INCREASES the carrying value of the bond to its cost at date of purchase
Fair value adjustments for TS are typically recognized
in a separate valuation account
What types of debt investments are reported at fair value?
AFS and TS
What event is of little importance if an investment in debt securities is held to maturity?
Changes in fair value during the holding period
Interest received is calculated based on the ______ interest rate
Interest received is calculated based on the STSTED interest rate
Rather than debiting or crediting the investment account, fair value adjustments for trading securities are typically recognized in separate accounts T/F
Rather than debiting or crediting the investment account, fair value adjustments for trading securities are typically recognized in separate accounts TRUE.
the price of a bond is equal to the
The price of a bond is equal to the present value of future cash receipts.
Margot Company purchase $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-months period:
$2750 ($110,000x.025)
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-monts period:
$3000 ($100,000x .03)
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 the bonds will be?
$500,000 face amount
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 on the investment is.
3.5% 7% market rate is 3.5% semi annually
Bonds provide two sources of cash flows to investors. These are associated with the payment of
Bonds provide two sources of cash flows to investors. These are associated with the payment of interest and pricipal
For discounted bonds, interest revenue is ____ cash interest each interest period
For discounted bonds, interest revenue is greater than cash interest each interest period.
Regarding the finantial statement presentation of HTM securities
Gains and losses are shown in NET INCOME in the period in which the securities are sold and Unrealized holding gains and losses are disclosed in the notes to the financial statements
Proper accounting treatment for HTM
HTM carried at amortized cost and unrealized holding gains and losses are not recognized.
Holding bonds during periods in which the fair value of the bonds changes results in
Holding bonds during periods in which the fair value of the bonds changes results in unrealized holding gains and losses
If a bond sells for more than its maturity value, the bond sells at a ______
If a bond sells for more than its maturity value, the bond sells at a premium
If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using _____ ______ techniques.
If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using present value techniques
Changes in the Fair value are more relevant for trading debt securities than for HTM debt securities because they provide an indication of
Management's success at investing
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 make a fair value adjustment of $75,000 and Northern will report an unrealized holding gain in net income.
Holding gains and losses associated with investments properly classified as HTM are
Not recognized
Proper accounting treatment for TS
Proper accounting treatment for Trading securities are carried at fair value and unrealized holding gains and losses are recognized in NET INCOME
What is the most important concept or principle that explains the difference in reporting holding gains and losses?
Relevance
The discount on bond investment is
The discount on bond investment Is a contra asset account reduces the carrying value of the bond to its cost at date of purchase
The "discount on bond investments" account is a
The discount on bond investments is a contra asset account
The premium on bond investment
The premium on bond investment increases the carrying value of the bond to its cost at date of purchase
Gains and losses that have not been realized through sales of the related investment are also referred to as:
Unrealized holding gains and losses
What types of debt investments are reported at fair value?
What types of debt investments are reported at fair value? Available for sale and trading securities
On December 31, 2021, Sparrow Company has bonds with an amortized cost of $424,000 and a fair value of $452,000. These bonds are properly classified as TS. On January 12, 2022, Sparrow sells the bonds for $450,000. Just prior to recording the sale on January 12, 2022, the journal entry to update the fair value adjustment account will include
a credit to fair value adjustment $2,000
Investments that are properly classified as HTM should be carried at
amortized cost
Debt investments that do not meet the criteria for HTM or TS are classified as
available for sale
Debt investments that will not be held for their entire life or sold in the very near future are referred to as
available for sale
Porter Company classified its investment in the bond of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5000. The result of this increase in value will
be an increase in NET income
Holding gains and losses are unrealized because the related investment has not
been sold.
Debt investments in available for sale securities are reported at
fair value
If an investor has the positive intent and ability to hold a debt security until is matures, it should be classified as a
held to maturity security
Fair value adjustments for trading securities are typically recognized
in a separate valuation account
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
Holding gains and losses associated with investments properly classified as trading securities are
recognized as part of income
Gains and losses that have not been realized through sales of the related investment are also referred to as
unrealized gains and losses
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 should include CREDITS of
Credit $500,000 investments in HTM securities Credit $40,000 gain from sale of investment
If the market rate of interest decreases after a bond is purchased, the bond incurs
an unrealized holding gain
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
Debit CASH $3000 ($100000x.03) Credit Interest revenue $2750 ($110,000x.025) Credit premium on bond investment $250
An investment in trading debt securities is initially recorded at
cost
Which of the following statements regarding the initial recognition of debt investments is correct?
All debt investments are initially recorded at cost.
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
Greene Company purchases an investment in bonds issued by Blue Company. Greene intends to hold the bonds until they mature and dis not elect the fair value option. Greene should report the investment at
amortized cost
At the time of acquisition, debt investments are recorded at
At the time of acquisition, debt investments are recorded at cost.
Otto Company purchase $200,000 face amount, 8% semi-annual bonds when the market rate is 7$. The rate used to determine interest revenue for the first 6-months on the investment is
3.5%
Marlon Company recognizes interest revenue of $5400 related to its bonds; its periodic bond interest payment receipts are $5200. The bonds must have issued at
A discount
During the current period, Muenster Company amortized $5000 of discount relating to its investment in debt securities. The company's amortization next period should be ____ the current period
During the current period, Muenstem Company amortized $5000 of discount relating to its investments in debt securities. The company's amortization next period should be higher than the current period
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
If the market rate of interest decreases after the bond is purchased, the bond incurs
if the market rate of interest decreases after a bond is purchased, the bond incurs an unrealized holding gain
The primary reasons why holding gains and losses relating to HTM securities are not recognized even though they are recognized for TS and AFS securities probably is that the information
is less relevant
The primary reasons why holding gains and losses relating to held to maturity securities are not recognized even though they are recognized for TS and AFS securities probably is that the information is
less relevant
Changes in the fair value are more relevant for trading debt securities than HTM debt securities because they provide an indication of
management's success at investing
The price of a bond is equal to the
present value of future cash receipts
At the end of the accounting period, trading debt securities must be adjusted to ______ value
At the end of the accounting period, trading debt securities must be adjusted to fair value
Investors utilize the ______ interest rate to value the stream of cash flows associated with bond investments.
Investors utilize the market interest rate to value the stream of cash flows associated with bond investments
On the date of acquisition, an investment in bonds should be recorded at:
On the date of acquisition, an investment in bonds should be recorded at COST
Equity and debt securities are commonly referred to as ________
Equity and debt securities are commonly referred to as financial instruments
The price of a bond is equal to the
The price of a bond is equal to present value of future interest payments plus present value of principal
Greenly Company acquired $40,000 face amount bonds of Neumann Company. Greenly can expect to receive the following cash flows from its investment
Principal and interest
An investment in trading debt securities should initially be recorded at cost? T/F
An investment in trading debt securities should initially be recorded at cost TRUE
Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as _____ securities
Investments in debt securities acquired principally for the purpose of sell them in the near term are classified as trading securities
Common financial instruments that are used to finance or expand a company's operations?
Common stock, Corporate bonds, Preferred stock
What conditions must be present for a debt security to be classified as HTM?
Conditions must be present for a debt security to be classified as HTM the investment has the ability to hold the security until maturity and The investor intends to hold the security until maturity
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
Credit $500,000 Investment in HTM securities Credit $40,000 Gain from sale of investment
If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is
If the interest rate paid on a bond is lower than the market interest rate, the bond will sell for an amount that is MORE than its maturity value
Investment in debt securities classified as trading are reported on the balance sheet at ____ _____.
Investments in debt securities classified as trading are reported on the balance sheet at fair value
Cash flows from buying and selling HTM securities are typically classified as ____ activities on the statement of cash flows
Cash flows from buying and selling HTM securities are typically classified as investing activities on the statement of cash flows
Rosa Company purchases debt securities and classifies them as "available-for-sale" securities. How should Rosa recognize changes in the value of the investment?
As unrealized holding gain or loss in other comprehensive income
Bonds typically provide two sources of cash flows to investors. These are associated with the payment of
Bonds typically provide two sources of cash flows to investors. These are associated with the payment of interest and principal
For HTM debt instruments, the difference between fair value and amortized cost must be _____ in a ____ to the finacial statements
FOR HTM debt instruments, the difference between fair value and amortized cost must be included in a not to the financial statements.
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
Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as operating activities in the statement of cash flows
Margot company purchase $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
Debit Cash $3000 Credit Interest revenue $2750 Credit premium on bond investment $250
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
Debit Cash $520,000 Debit Discounts $20,000
Proper accounting treatment for AFS
Available for sale are carried at fair value and unrealized holding gains and losses are recognized in other comprehensive income
Marian Company's records show the following account balances at 2/1/18: Investment in HTM securitues, $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
Debit cahs $520,000 Debit Discount $20,000
Interest received is calculated based on the _____interest rate
Interest received is calculated based on the stated interest rate
On december 31, 2021, Gardner Company holds debt securities classified as HTM with a face amount of $100,000 and carrying value of $95,000. The bonds have an effective interest rate of 6% and pay interest of $2500 semi-annually on June 30 and December 31. The journal entry to record the interest payment on December 31, 2021 includes
Debit cash $2850 ($95,000x.03) Credit Interest revenue $2500 Credit premium on bond investment
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. Northern properly classifies these bonds as trading securities. prior to recording the sale, the journal entry to adjust the bonds to fair value includes
Debit to fair value adjustment Credit to unrealized holding gain on trading securities (NI)
