Chapter 12 Smartbook

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.

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. - $20,000 to gain. - $20,000 to loss.

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

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.

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

an unrealized holding gain

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

fair

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

fair value

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.

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

investing

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

present value

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

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

trading

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.

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

unrealized holding gains and losses

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.) - $480,000 to investments in HTM securities. - $20,000 to gain from sale of investment. - $20,000 to discounts. - $40,000 to gain from sale of investment. - $500,000 to investments in HTM securities.

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

Which of the following are correct regarding the financial statement presentation of HTM securities? (Select all that apply.) - Unrealized holding gains and losses are shown in net income. - Gains and losses are shown in net income in the period in which the securities are sold. - Unrealized holding gains and losses are shown in other comprehensive income. - 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. - Unrealized holding gains and losses are disclosed in the notes to the financial statements.

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 maturity date is less than 90 days from the date of purchase. - The investor intends to hold the security until maturity. - The investment can be classified as a current asset.

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

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 fair value adjustment $80,000. - debit to discount on bond investment $100,000 - credit to gain on trading securities - net income $80,000 - debit to cash $680,000 - credit to investment in bonds $700,000 - debit to loss on trading securities-net income $20,000 - debit to fair value adjustment $80,000

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