Investment

The premium on bond investment (Select all that apply.)

increases the carrying value of the bond to its cost at date of purchase

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

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

Investors use this interest rate to value investments in bonds:

Market interest rate

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

been sold.

Trading securities typically are classified in the balance sheet as

current assets

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

premium

The price of a bond is equal to the

present value of future cash receipts

True or false: An investment in trading debt securities should initially be recorded at cost.

True

Which of the following are correct regarding the financial statement presentation of HTM securities? (Select all that apply.)

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.

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

An investment in trading debt securities is initially recorded at

cost

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. (Enter one word per blank.)

income; statement

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

market

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

Interest Principal

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

unrealized holding gains and losses

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.

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

other comprehensive income.

Which of the following are common financial instruments that are used to finance or expand a company's operations? (Select all that apply.)

Preferred stock Common stock Corporate bonds

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

an unrealized holding gain

Equity and debt securities are commonly referred to as _____ instruments. (Enter only one word.)

financial or financing

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

greater than

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, (Select all that apply.)

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

Which of the following statements about the accounting for debt investments are true? (Select all that apply.)

When debt investments are purchased, they are recording 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

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

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

not recognized

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

Holding gains and losses associated with investments properly classified as "trading securities" are

recognized as part of income.

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 (Select all that apply.)

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

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 (Select all that apply.)

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

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?" (Select all that apply.)

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

Match the type of debt investment with the proper accounting treatment. Held-to-maturity Trading Available-for-sale

Held-to-maturity: Carried at amortized cost and unrealized holding gains and losses are not recognized Trading: Carried at fair value and unrealized holding gains and losses are recognized in net income Available-for-sale: Carried at fair value and unrealized holding gains and losses are recognized in other comprehensive income

Which of the following types of debt investments are reported at fair value? (Select all that apply.)

Trading Available-for-sale

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? (Select all that apply.)

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

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 Reason: $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 (Select all that apply.)

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

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

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.

The price of a bond is equal to

present value of future interest payments plus present value of principal

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

principal interest

At the end of the current fiscal period, the fair value of Orbit Company's investment in AFS debt securities exceeds its carrying value by $20,000. Orbit should

recognize an unrealized holding gain in OCI.

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

relevance

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

trading

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

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

unrealized holding gains and losses

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% Semi-annual means 2 time a year. Divide the 6% into two

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 statements about investments in bonds are true? (Select all that apply)

If the stated rate is higher that the market rate, investors will purchase the bond at a premium. The purchase price of a bond security is determined by computing the present value of the related stream of cash flows.

Which of the following is the most important concept or principle that explains the differences in reporting holding gains and losses?

Relevance

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

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

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

amortized cost.

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.

The "discount on bond investments" account is a

contra-asset account.

At the time of acquisition, debt investments are recorded at

cost

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 (Select all that apply.)

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

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 (Select all that apply.)

credit to unrealized holding gain on trading securities - net income $5,000 debit to fair value adjustment $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 (Select all that apply.)

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

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

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

fair market value.

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

Fair value adjustments for trading securities are typically recognized

in a separate valuation account.

Over the life of the investment, amortization of a discount

increases each period

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

investing