Investments ACCT 3302
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
debit to fair value adjustment $75,000 credit to unrealized holding gain on AFS securities - OCI $75,000
If a bond sells for less than its maturity value the bond sells at a
discount
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
$20,000 to discounts $520,000 to cash
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
Debt securities that are classified as available-for-sale or trading are valued at
fair market value
Investments in debt securities classified as trading are reported on the balance sheet at ______ ______.
fair or market; value
Debt investments in available-for-sale securities are reported at
fair value
The fair value option can be applied to:
financial assets financial liabilities
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% Reason: Interest received uses the stated rate and the bonds are semi-annual so 6%/2
Which of the following statements regarding the initial recognition of debt investments is correct?
Al debt investments are initially recorded at cost
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
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
Investors must disclose this information related to their investments.
Changes in net unrealized holding gains and losses Aggregate fair value Amortized cost basis by major type Gross realized and unrealized holding gains and losses
For each year presented, investors should disclose the following in the disclosure notes related to investments:
Description of the valuation techniques used in the fair value measurement process Aggregate fair value Gross realized and unrealized holding gains and losses
Equity and debt securities are commonly referred to as ______ instruments.
Financial or Financing
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
Which of the following are correct regarding the financial statement presentation of HTM securities?
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.
Amortized Cost: Fair value through other comprehensive income (FVOCI): Fair value through profit or loss (FVPL):
Held-to-Maturity Available-for-sale Trading
Match the type of debt investment with the proper accounting treatment: Held-to-maturity Trading Available-for-sale
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.
Greenly Company acquired $40,000 face amount bonds of Neumann Company. Greenly can expect to receive the following cash flows from its investment.
Interest and principal
Holding gain or loss in other comprehensive income: Holding gain or loss in income: No holding gain or loss is recognized:
Investment in available-for-sale debt securities Investment in trading debt securities Investment in held-to-maturity debt securities
Investors utilize the _______ interest rate to value the stream of cash flows associated with bond investments
Market
Characteristics that support classification of investments as trading securities include
Motivation to realize short-term profits frequent and active trading
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.
Adjustments must be made to _____ to account for the tax effects of debt investments.
OCI AOCI
Correctly match the account balances related to AFS debt securities with the correct financial statement presentation. Other comprehensive income: Net income: Accumulated other comprehensive income:
Other comprehensive income: Current period holding gains or losses Net income: realized gains and losses from the sale of AFS securities Accumulated other comprehensive income: Net fair value adjustments to date - net holding gains and losses to date
How are available-for-sale debt securities reported?
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.
Which of the following is the most important concept or principle that explains the differences in reporting holding gains and losses?
Relevance
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
Which of the following is correct regarding the fair value option?
The election can be applied to selected securities The election is irrevocable
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.
For discounted bonds, interest revenue is ______ cash interest each interest period.
greater than
The premium on bond investment
increases the carrying value of the bond to its cost at date of purchase
Accounting for held-to-maturity, trading, and available-for-sale debt securities is the same with respect to
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
The primary reasons why holding gains and losses related 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
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
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
The interest rate for debt of similar and maturity is referred to as the ______ interest rate.
market
Investors use this interest rate to value investments in bonds:
market interest rate
Under the fair value option, unrealized gains and losses on HTM and AFS debt securities are recognized in ______ ______ in the period they occur.
net income
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
Holding gains and losses associated with investments properly classified as held-to-maturity are
not recognized
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
Unrealized gains and losses on AFS debt securities must be recognized in
other comprehensive income
Consistent with IFRS, the fair value option is:
permitted only in specific cicumstances
The price of a bond is equal to the
present value of future cash receipts.
The price of a bond is equal to the
present value of future interest payments plus present value of principal
Bonds typically provide two sources of cash flows to investors. These are associated with the payment of
principal interest
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 nett income
Which of the following fundamental concepts or principles supports the use of the fair value method?
relevance
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
Accounting for held-to-maturity, trading, and available-for-sale debt securities differs with respect to
the year-end fair value adustment
Investments in debt securities acquired principally for the purpose of selling them in the near term are classified as ________ securities.
trading
Extensive disclosures relating to investments primarily benefit financial statement
users
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
Consistent with IFRS, the fair value method may be chosen to avoid
accounting mismatch
The eventual effect of the different methods of recognizing holding gains and losses for debt securities on total income is
always the same
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 options. Greene should report the investment at
amortized cost
Investments that are properly classified as held-to-maturity should be carried at
amortized cost
Extensive financial statement disclosures are required for investments because they help financial statement users
assess the quality of fair value measurements underestimate the effect of fair value measurement
Holding gains and losses are unrealized because the related investment has not
been sold
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
An investment in trading debt securities is initially recorded at
cost
At the time of acquisition, debt investments are 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
Trading securities typically are classified in the balance sheet as
current assets.
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
Gains and losses that have not been realized through sales of the related investment are also referred to as:
unrealized holding gains and losses
Holding bonds during periods in which the fair value of the bonds changes results in
unrealized holding gains and losses
The choice to classify debt securities as current or noncurrent depends on
when they are expected to mature or be sold
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
If the market rate of interest decreases after a bond is purchased, the bond incurs
an unrealized holding gain
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 liabilities deferred tax assets
For discounted bonds, interest revenue is ____ cash interest each interest period.
greater than
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 * (6% * 6/12)
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
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
When accounting for the sale of AFS debt securities, how are unrealized gains reversed?
debit a reclassification adjustment credit the fair value adjustment account
For held-to-maturity debt instruments, the difference between fair value and amortized cost must be ______ in a ______ to the financial statements.
disclosed; notes
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
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 ann 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
Which of the following types of debt investments are reported at fair value?
Trading Available-for-sale
An investment in trading debt securities should initially be recorded at cost
True
Rather than debiting or crediting the investment account, fair value adjustments for trading securities are typically recognized in a separate account.
True
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
Debt investments that do not meet the criteria for held-to-maturity or trading securities are classified as ______-______-______.
available; for; sale
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 are common financial instruments that are used to finance or expand a company's operations?
common stock preferred stock corporate bonds
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
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 debit to cash $680,000 credit to investment in bonds $700,000 credit to fair value adjustment $80,000
Gains and losses relating to debt securities classified as trading are presented in the ______ ______ in the periods in which fair value changes, regardless of whether they are realized or unrealized.
income statement
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 price of a bond is equal to the
present value of future cash reciepts
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
At the end of the accounting period, trading debt securities must be adjusted to ______ value.
fair or market
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
$40,000 to gain from sale of investment $500,000 to investments in HTM securities.
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
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 flow
Fair value adjustments for trading securities are typically recognized
in a separate valuation 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 (Select all that apply.)
debit cash $2500 debit discount on bond investment $350 Reason: 2850 - 2500 credit interest revenue $2850 Reason: $95000 * 0.03 = 2850
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
debit cash $3,000 credit interest revenue $2,750 credit premium on bond investment $250
Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9?
fair value through OCI fair value through profit or loss amortized cost
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 Reason: The FV adjustment account decreased to reflect decrease in the fair value of $2,000 from 12/31/21 to 1/12/22. The decrease is reflected in OCI for AFS debt securities.
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
