Ch. 12 Reading Questions

On 12/31/16, Gardener Company holds debt securities classified as HTM with a face amount of $100k and a carrying value of $95k. The bonds have an effective interest rate of 6% and pay interest of $2,500 semi-annually on June 30 and Dec. 31st. The effective interest recognized for the six month ended Dec. 31, '16 is:

$2850 (95k*.03 = $2,850)

Significant influence is typically assumed if the investor owns at least _____% of the equity of the investee

20%

Rosa company purchases securities and classifies them as "trading securites" How should Rosa recognize changes in the value of the investment?

As holding gain or loss in income

An investor who owns more than 50% of the outstanding voting stock of an investee company is assumed to have what?

Control

Investments classified as AFS securities are initially recognized at:

Cost

Gains and losses arising from the same of HTM securities must be recognized as a part of____________? (income/equity)

Income

Porter Co. classified its investment in Bailey Co. 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

An important factor that determines accounting for investment is:

Influence or control over investee entity

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 HTM. At the accounting period, the value of the investment appreciated by $10,500. The company should:

Not recognize the gain

Holding gains and losses associated with investments properly classified as HTM are:

Not recognized

Unrealized gains and losses on AFS securities must be recognized in

OCI

What info is necessary to calculate interest revenue each period?

Outstanding debt balance Effective Interest Rate

The price of a bond is equal to...?

Present value of future receipts

Holding gains and losses associated with investments properly classified as AFS are:

Recognized as OCI

The determining factor that affects financial accounting and reporting for investments is whether the investor exerts _____________ _______________ over the operating and financial policies of the investee

Significant Influence

Investments in debt or equity securities acquired principally for the purpose of selling them in the near future are classified as what type of securities?

Trading

When the fair value option is chosen, all securities are classified as __________ securities

Trading

True/False: All investments are initially recorded at cost

True

True/False: An investment in trading securities should initially be recorded at cost

True

Green Co. purchases an investment in bonds issued by the Blue Co. Green intends to hold the investment bonds until they are mature and did not elect the fair value option. Green should report the investment at:

amortized cost

Investments that are properly classified as HTM should be carried at:

amortized cost

Dividends earned on an investment in trading securities are credited to:

investment revenue

Emil Co. purchases $400k face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest revenue for the for first 6 months on the investment is:

4%

If a bond sells for less than its maturity value, it is sold at a _________.

Discount

What are securities that are classified as AFS or TS valued at?

Fair Market Value

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

Fair value

Investments classified as "AFS" securities are reported at:

Fair value

True/False: At the end of its accounting period, Klein Corp. determines that its investment in AFS securities has increased by $10,000. This holding gain will increase the company's net income for the current year

False; Other comprehensive income

What are two characteristics that support classification of investments as trading securities

Frequent and active trading Motivation to realize short-term profits

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 (HTM) security

Under the fair value option, gains and losses on investment securities are recognized in

Net income

Cash interest is calculated with reference to the _________ interest rate

Stated