Accounting SB CH 12
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
Match the treatment of unrealized gains and losses on debt investments existing at the time of transfer between investment categories with the correct transfer scenario.
AFS or HTM to Trading- included in current net income. Trading to AFS or HTM- None are recognized because they already have been recognized in income. HTM to AFS- Other comprehensive income (part of equity). AFS to HTM- Amortize to net income over remaining life.
Match the IFRS debt instrument category with the corresponding US GAAP category with similar accounting treatment.
Amortized Cost - Held-to-Maturity Fair value through other comprehensive income (FVOCI) - Available-for-Sale Fair value through profit or loss (FVPL)- Trading
Match the type of debt investment with the proper accounting treatment
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
What type of financial statement items are combined in the process of preparing consolidated financial statements?
Item-by-item numbers from the individual parent and subsidiary financial statements
Which of the following types of debt investments are reported at fair value?
Trading Available-for-sale
Master Company owns 15% of the outstanding voting stock of Sell Company. Master should
apply the fair value through net income method.
On the date of acquisition, an investment in bonds should be recorded at
cost
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 discount on bond investment $100,000 credit to investment in bonds $700,000 debit to cash $680,000 credit to fair value adjustment $80,000.
Debt securities that are classified as available-for-sale or trading are valued at
fair market value
The interest rate for debt of similar risk and maturity is referred to as the _____ interest rate.
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.
Holding gains and losses associated with investments properly classified as "held-to-maturity" are
not recognized
Which of the following is the most important concept or principle that explains the differences in reporting holding gains and losses?
relevance
When fair value of equity investments is not readily determinable (select all that apply)
the investor needs to continually evaluate whether fair value is readily determinable. the fair value is estimated as cost, adjusted for previous impairments and changes in the prices of similar equity investments. the investor needs to assess annually whether the investment is impaired.
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 (Select all that apply.)
credit to unrealized holding gain on AFS securities - OCI $5,000 debit to fair value adjustment $5,000.
Debt investments classified as "available-for-sale" securities are reported at
fair value
Match the terms with the correct descriptions.
Parent matches Investor who controls another entity through majority stock ownership. Subsidiary matches Company that is controlled by another entity. Fair Value through Net Income matches Approach used to account for equity investments for which the investor lacks significant influence.
