Acc 3302 CH. 12 Smartbook

For held-to-maturity debt instruments, the difference between fair value and amortized cost must be _____ in a _____ to the financial statements.

disclosed; notes

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)

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

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

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

True

Fair value adjustments for trading securities are typically recognized

in a separate valuation account.

The premium on bond investment

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

The price of a bond is equal to the

present value of future cash receipts.

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

the year-end fair value adjustment.

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

been sold

At the time of acquisition, debt investments are recorded at

cost

Gerhard Company purchases debt investments for $200,000 and classifies them as available-for-sale securities. At the end of the accounting period, the fair value has increased to $207,000. Gerhard should report its investment at

$207,000

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

For each year presented, investors should disclose the following in the disclosure notes related to investments:

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

Which of the following conditions must be present for a debt security to be classified as "held-to-maturity?"

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

Characteristics that support classification of investments as trading securities include

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

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%

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 -Interest payment received during the holding period -Amortized bond discount or premium

Changes in fair value during the holding period

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:

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

Carried at amortized cost and unrealized holding gains and losses are not recognized

Held-to-maturity

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

OCI AOCI

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

Relevance

Which of the following is correct regarding the fair value option?

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

Carried at fair value and unrealized holding gains and losses are recognized in net income

Trading

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

Consistent with IFRS, the fair value method may be chosen to avoid

accounting mismatch

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

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

amortized cost

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

The "discount on bond investments" account is a

contra asset account

On the date of acquisition, an investment in bonds should be recorded at:

cost

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

When accounting for the sale of AFS debt securities, how are unrealized gains reversed?

debit a reclassification adjustment credit the fair value adjustment account

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

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

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?

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. 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:

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

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

debit to fair value adjustment $5,000. credit to unrealized holding gain on trading securities - net income $5,000

Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as available for sale (AFS) securities. At the end of the reporting period, the journal entry includes (Select all that apply.)

debit to fair value adjustment $75,000. credit to unrealized holding gain on AFS securities - OCI $75,000

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 _________.

deferred tax assets deferred tax liabilities

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 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

Debt investments classified as "available-for-sale" securities are reported at

fair value

Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9?

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

Archie Inc. has available-for-sale debt securities that have a fair value that exceeds their amortized cost, and Archie has been recording changes in fair value over the life of the securities. If Archie now sells those securities, it should reverse previous unrealized holding _____ included in ______.

gains / OCI

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

greater than

Greene Corporation does not recognize unrealized holding gains and losses for its bond investments. If the company is properly applying U.S. GAAP, its investment must be classified as

held-to-maturity

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

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

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

The primary reasons why holding gains and losses relating to held-to-maturity securities are not recognized even though they are recognized for trading and AFS securities probably is that the information is

less relevant

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

Investors utilize the ________ interest rate to value the stream of cash flows associated with bond investments.

market

Investors use this interest rate to value investments in bonds:

market interest rate

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

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

net income

Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as ______ activities in the statement of cash flows.

operating

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

principal and interest

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

principal and 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.

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

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

relevance

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.

Folger Company recognizes an unrealized holding gain for debt investments that are classified as AFS. If the company had classified the investments as trading securities, its total shareholders' equity would be

the same

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

trading

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

unrealized holding gains and losses

Extensive disclosures relating to investments primarily benefit financial statement

users

The choice to classify debt securities as current or non-current depends on

when they are expected to mature or be sold.

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.

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

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

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

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

How are available-for-sale debt securities reported?

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

Which of the following are correct regarding the financial statement presentation of HTM securities?

-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.

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

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

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

Investors must disclose this information related to their investments

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

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.

Carried at fair value and unrealized holding gains and losses are recognized in other comprehensive income

Available-for-sale

Which of the following are common financial instruments that are used to finance or expand a company's operations?

Preferred stock, common stock, and corporate bonds

Which of the following types of debt investments are reported at fair value?

Trading Available-for-sale

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

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

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

an unrealized holding loss

Extensive financial statement disclosures are required for investments because they help financial statement users

assess the quality of fair value measurements. understand the effect of fair value measurement.

Debt investments that do not meet the criteria for held-to-maturity or trading securities are classified as

available for sale

Debt investments that will not be held for their entire life or sold in the very near future are referred to as

available for sale securities

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.

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

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

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.

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

premium

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.

The fair value option can be applied to:

financial liabilities financial assets

Consistent with IFRS, an investment that meets the "SPPI" criteria is accounted for using amortized cost if the business purpose of the investment is to

hold the investment to collect the contractual cash flows.

Under IFRS, one of the conditions that must be met in order to carry investments at "amortized cost" is that contractual cash flows

consist only of principal and interest payments.

Interest received is calculated based on the _____ interest rate.

face or stated

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

fair or market value

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

an unrealized holding gain

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.

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

fair value

Equity and debt securities are commonly referred to as

financial instruments

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.

Blum Company invested in debt securities and classified them as "held-to-maturity." At the accounting period, the value of the investment appreciated by $10,500. The company should

not recognize the unrealized gain.

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

not recognized

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

always the same.