Intermediate Accounting 2 Chapter 12 part 1

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. (Assume the debt investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed.)

$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 Reason: $95,000 x 0.03 = $2,850

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 AFS securities. Prior to recording the sale, the journal entry to adjust the bonds to fair value includes

-debit to fair value adjustment $5,000. -credit to unrealized holding gain on AFS securities - OCI $5,000

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%

Emil Company purchases $400,000 face amount, 8% semi-annual 15-year bonds when the market rate is 7%. The number of interest periods utilized to determine interest revenue earned on the investment is

30 periods.

Credit losses would correctly be calculated as the difference between the amortized cost of debt and:

Expected future cash flows multiplied by the effective interest rate that existed when the investment was acquired.

Investors must disclose this information related to their investments.

Gross realized and unrealized holding gains and losses Amortized cost basis by major type Aggregate fair value Changes in net unrealized holding gains and losses

For each year presented, investors should disclose the following in the disclosure notes related to investments:

Gross realized and unrealized holding gains and losses Description of the valuation techniques used in the fair value measurement process Aggregate fair value

AFS or HTM to Trading

Included in current net income.

Unrealized holding gains and losses are included in an investor's earnings for: Trading SecuritiesSecurities Available-For-Salea.YesNob.YesYesc.NoYesd.NoNo

Option A

Ricardo Company chose the fair value option (FVO) for accounting for a new investment in AFS debt securities. Which of the following statements is correct?

Ricardo's choice is irrevocable.

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.

Which of the following is correct regarding the fair value option?

The election can be applied to selected securities. The election is irrevocable.

Which of the following types of debt investments are reported at fair value?

Trading Available-for-sale

The accounting for unrealized holding gains and losses will be different if the fair value option is elected for all of the following types of investments except:

Trading security

True or false: Rather than debiting or crediting the investment account, fair value adjustments for trading securities are typically recognized in a separate account.

True

The eventual effect of the different methods of recognizing holding gains and losses for debt securities on total income is

always the same.

Extensive financial statement disclosures are required for investments because they help financial statement users

assess the quality of fair value measurements. understand the effect of fair value measurement.

Debt investments that do not meet the criteria for held-to-maturity or trading securities are classified as _____________-_______________-______________.

available-for-sale

Holding gains and losses are unrealized because the related investment has not

been sold.

Under IFRS, transfers of debt securities between the amortized cost, FVOCI, and FVPL categories occur if and only if the company

changes its business model with respect to the debt investment.

Under IFRS, one of the conditions that must be met in order to carry investments at "amortized cost" is that contractual cash flows

consist only of principal and interest payments.

The "discount on bond investments" account is a

contra-asset account.

At the time of acquisition, debt investments are recorded at

cost

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

cost

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?

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

When accounting for the sale of AFS debt securities, how are unrealized gains reversed?

credit the fair value adjustment account debit a reclassification adjustment

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

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. Northern properly classifies these bonds as trading securities. Prior to recording the sale, the journal entry to adjust the bonds to fair value includes

credit to unrealized holding gain on trading securities - net income $5,000 debit to fair value adjustment $5,000.

Trading securities typically are classified in the balance sheet as

current assets.

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.

Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as available for sale (AFS) securities. At the end of the reporting period, the journal entry includes

debit to fair value adjustment $75,000. credit to unrealized holding gain on AFS securities - OCI $75,000

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.

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

The appropriateness of the classification of debt investments must be reassessed

each reporting date

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

fair

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

fair market value.

Debt investments classified as "available-for-sale" securities are reported at

fair value

Debt investments in available-for-sale securities are reported at

fair value

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

fair value

Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9?

fair value through profit or loss fair value through OCI amortized cost

The fair value option can be applied to:

financial assets financial liabilities

Archie Inc. has available-for-sale debt securities that have a fair value that exceeds their amortized cost, and Archie has been recording changes in fair value over the life of the securities. If Archie now sells those securities, it should reverse previous unrealized holding _____ included in ______.

gains / OCI

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

greater than

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.

Consistent with IFRS, an investment that meets the "SPPI" criteria is accounted for using amortized cost if the business purpose of the investment is to

hold the investment to collect the contractual cash flows.

Fair value adjustments for trading securities are typically recognized

in a separate valuation account.

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

Over the life of the investment, amortization of a discount

increases each period.

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

interest principal

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 AFS debt securities are typically shown on the Statement of Cash Flows in the _____ activities section.

investing

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

investing

Changes in the fair value are more relevant for trading debt securities than for held-to-maturity debt securities because they provide an indication of

management's success at investing

Interest revenue is calculated based on the _______________ interest rate.

market

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

market

Blum Company invested in debt securities and classified them as "held-to-maturity." At the accounting period, the value of the investment appreciated by $10,500. The company should

not recognize the unrealized gain.

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

not recognized.

Unrealized gains and losses on AFS debt securities must be recognized in

other comprehensive income.

Consistent with IFRS, transfers between investment categories are

permitted only in rare circumstances.

Consistent with IFRS, the fair value option is:

permitted only in specific circumstances

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

present value

The price of a bond is equal to the

present value of future cash receipts.

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

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

principal interest

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.

Which of the following fundamental concepts or principles supports the use of the fair value method?

relevance

Interest received is calculated based on the ___________ interest rate.

stated

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

trading

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

when they are expected to mature or be sold.

Characteristics that support classification of investments as trading securities include

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

AFS to HTM

Amortize to net income over remaining life.

HTM to AFS

Other comprehensive income (part of equity).

Consistent with IFRS, the fair value method may be chosen to avoid

accounting mismatch

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

amortized cost.

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

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

Gerhard Company purchases debt investments for $200,000 and classifies them as available-for-sale securities. At the end of the accounting period, the fair value has increased to $207,000. Gerhard should report its investment at

$207,000.

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

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.

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.

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.

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.

The discount on bond investment

- reduces the carrying value of the bond to its cost at date of purchase - is a contra-asset account

Which of the following events is of little importance if an investment in debt securities is held to maturity.

Changes in fair value during the holding period

True or false: Any unrealized holding gain or loss that exist when a transfer of investment category occurs should be immediately recognized into income.

False Reason: Any unrealized holding gains or losses at reclassification should be accounted for in a manner consistent with the classification into which the security is being transferred.

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:

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

Trading to AFS or HTM

None are recognized because they already have been recognized in income.

Adjustments must be made to _____ to account for the tax effects of debt investments

OCI AOCI

Adjustments must be made to _____ to account for the tax effects of debt investments.

OCI AOCI

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

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.

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

Porter Company classified its investment in the bonds of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5,000. The result of this increase in value will

be an increase in net income.

Which of the following represents a key difference between the three debt investment classifications (HTM, AFS, trading) with respect to financial reporting?

classification of unrealized gains and losses

Adjustments made to OCI and AOCI to account for the tax effects of unrealized holding gains and losses on available-for-sale debt securities also give rise to _________.

deferred tax liabilities deferred tax assets

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

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.

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

Extensive disclosures relating to investments primarily benefit financial statement

users.

Investment securities are reported on a balance sheet at fair value for: Trading SecuritiesSecurities Available-For-Salea.YesNob.YesYesc.NoYesd.NoNo

Option b

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 AFS securities. 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 adjust the bonds to fair value will include

A debit to unrealized holding loss - OCI $2,000

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.

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 securities

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.

How are available-for-sale debt securities reported?

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

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. Northern will report an unrealized holding gain in net income.

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

an unrealized holding loss

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

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

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

market

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.

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 trading debt securities. 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

On December 31, 2021, 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, 2021 includes

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

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.

Gains and losses that have not been realized through sales of the related investment are also referred to as:

unrealized holding gains and losses

Unrealized holding gains and losses for trading securities are:

Included in the determination of income from operations in the period of the change.

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

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