ACTG 12 Chapter

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

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.)

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

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

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

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.

Investors must disclose this information related to their investments. (Select all that apply.)

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

Andrea Company purchases 30% of Sander Company's outstanding stock for $420,000. Andrea should record this investment at

Cost

Which reporting method should be used if the investor can exert significant influence over the investee?

Equity method

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: (Select all that apply.)

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

For each year presented, investors should disclose the following in the disclosure notes related to investments: (Select all that apply.)

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

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

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

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.

Adjustments must be made to _____ to account for the tax effects of debt investments. (Select all that apply.)

OCI AOCI

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.

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

True: Reason: All investments are recorded initially at cost.

Von Company properly applies the equity method in accounting for its investment in Neumann Inc. Which of the following statements are correct? (Select all that apply.)

Von has significant influence over Neumann. Von owns 20-50% of Neumann's voting shares.

the principal

also called face amount

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

An investment in trading debt securities is initially recorded at

cost

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. Adrianna should record this investment with (Select all that apply.)

credit cash $450,000 debit investment in Saddle $450,000

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.

Choose the correct debit and credit for the investor's recognition of income reported by the investee when using the equity method.

debit investment account credit investment revenue

Under the equity method, dividends received from the investment

decrease the investment account balance

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 _________. (Select all that apply.)

deferred tax liabilities deferred tax assets

The appropriateness of the classification of debt investments must be reassessed

each reporting date

Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9? (Select all that apply.)

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

The fair value option can be applied to: (Select all that apply.)

financial assets financial liabilities

Characteristics that support classification of investments as trading securities include (Select all that apply.)

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

Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as

operating

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.

Under the fair value option, unrealized gains and losses on debt securities are

recognized in net 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 credits of (Select all that apply.)

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

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

when they are expected to mature or be sold.

Winston Company has significant influence over the operating and financial policies of Xavier Company. Winston should report its investment utilizing the

Blank 1: equity

Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in

Blank 1: net Blank 2: income

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

Fair Value

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

Fair Value

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

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

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

Parker Company owns 30% of Sandra Company's stock. Which of the following will decrease the investment account?

Parker receives dividends from Sandra Company.

How are available-for-sale debt securities reported? (Select all that apply.)

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

Ziegler Company owns 40% of Norm Company's outstanding voting stock. During the current year, Norm reported income of $2 million and declared dividends of $1 million. Ziegler should report income from its investment of

Reason: $2 million x 40% $800,000

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.

Parker Company owns 30% of Sandra Company's stock. Which of the following will increase the investment account?

Sandra Company reports income.

Which of the following is correct regarding the fair value option? (Select all that apply.)

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

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

always the same.

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

Consistent with the equity method, investment income is

based on investee's income times ownership percentage.

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.)

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

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.)

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

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 AFS securities. Prior to recording the sale, the journal entry to adjust the bonds to fair value includes (Select all that apply.)

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

Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to (Select all that apply.)

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

Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by debiting

investment in Saddle Company for $70,000.

Goober Company is able to control the operating and financial policies of Stein Company. Goober should

issue consolidated financial statements.

Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to (Select all that apply.)

the initial investment. interest revenue earned on investment.

Accounting for held-to-maturity, trading, and available-for-sale debt securities differs with respect to

the year-end fair value adjustment.

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.