ACCT 405 - Chapter 12 | Latest study |
Questions and verified Answers
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 - ANSW-be an increase in net income
Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The
rate used to determine interest revenue for the first 6 months on the investment is - ANSW-3.5% (the
rate is divided by 2)
Characteristics that support classification of investments as trading securities include - ANSW-motivation
to realize short-term profits and frequent and active trading
An investment in trading debt securities is initially recorded at - ANSW-Cost
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 - ANSW-3%
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 - ANSW-Northern
will report an unrealized holding gain in net income and Northern will make a fair value adjustment of
$75,000
Holding gains and losses associated with investments properly classified as "trading securities" are -
ANSW-recognized as part of income
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? - ANSW-debit to cash $99,000, debit to discount $2,000, credit investment in bonds $100,000,
credit to fair value adjustment $1,000
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 revenue for the first 6-month
period - ANSW-2750 (110,000*5%/2)
Cash flows from buying and selling debt securities classified as trading as a part of normal operations
typically are classified as what type of activities in the statement of cash flows? - ANSW-Operating
Trading securities typically are classified in the balance sheet as - ANSW-Current Assets
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 - ANSW-an increase in other comprehensive income
True or false: An investment in trading debt securities should initially be recorded at cost - ANSW-True
How are available-for-sale debt securities reported - ANSW-Realized gains and losses are reported in net
income in the period the investment is sold and unrealized gains and losses are reported as part of other
comprehensive income when they occur
At the end of the accounting period, trading debt securities must be adjusted to what value? - ANSW-
Fair Value
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 - ANSW-Investment in AFS - $18,000, Gain on sale of investment - $2,000
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 -
ANSW-debit to cash $680,000
credit to investment in bonds $700,000
credit to fair value adjustment $80,000.
debit to discount on bond investment $100,000
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? - ANSW-Net income may otherwise
appear more volatile than it actually is
Other comprehensive income (AFS debt securities) - ANSW-Current period holding gains or losses
Net Income (AFS debt securities) - ANSW-Realized gains and losses from the sale of AFS securities
Accumulated OCI (AFS debt securities) - ANSW-Net fair value adjustments to date - net holding gains and
losses to date
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash
Flows in what activities section? - ANSW-Investing
Which of the following are categories available for classifying investments in debt securities consistent
with IFRS No. 9? - ANSW-fair value through OCI
amortized cost
fair value through profit or loss
Adjustments must be made to _____ to account for the tax effects of debt investments. - ANSW-OCI and
AOCI
For each year presented, investors should disclose the following in the disclosure notes related to
investments - ANSW-Description of the valuation techniques used in the fair value measurement process
Gross realized and unrealized holding gains and losses
Aggregate fair value
Which of the following are possible categories for the purpose of classifying investments in the stock of
another company? - ANSW-no significant influence or control
control
significant influence
How is an equity investment that lacks significant influence adjusted to fair value at the end of each
reporting period? - ANSW-A valuation allowance account is increased or decreased
When equity investments that lack significant influence are sold and a fair value adjustment account has
been used to increase or decrease the carrying value of the investment, the investment account is
credited for the - ANSW-original cost of the investment
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks
significant influence over Mark Corp. James Company should - ANSW-Credit dividend revenue
Questions and verified Answers
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 - ANSW-be an increase in net income
Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The
rate used to determine interest revenue for the first 6 months on the investment is - ANSW-3.5% (the
rate is divided by 2)
Characteristics that support classification of investments as trading securities include - ANSW-motivation
to realize short-term profits and frequent and active trading
An investment in trading debt securities is initially recorded at - ANSW-Cost
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 - ANSW-3%
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 - ANSW-Northern
will report an unrealized holding gain in net income and Northern will make a fair value adjustment of
$75,000
Holding gains and losses associated with investments properly classified as "trading securities" are -
ANSW-recognized as part of income
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? - ANSW-debit to cash $99,000, debit to discount $2,000, credit investment in bonds $100,000,
credit to fair value adjustment $1,000
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 revenue for the first 6-month
period - ANSW-2750 (110,000*5%/2)
Cash flows from buying and selling debt securities classified as trading as a part of normal operations
typically are classified as what type of activities in the statement of cash flows? - ANSW-Operating
Trading securities typically are classified in the balance sheet as - ANSW-Current Assets
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 - ANSW-an increase in other comprehensive income
True or false: An investment in trading debt securities should initially be recorded at cost - ANSW-True
How are available-for-sale debt securities reported - ANSW-Realized gains and losses are reported in net
income in the period the investment is sold and unrealized gains and losses are reported as part of other
comprehensive income when they occur
At the end of the accounting period, trading debt securities must be adjusted to what value? - ANSW-
Fair Value
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 - ANSW-Investment in AFS - $18,000, Gain on sale of investment - $2,000
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 -
ANSW-debit to cash $680,000
credit to investment in bonds $700,000
credit to fair value adjustment $80,000.
debit to discount on bond investment $100,000
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? - ANSW-Net income may otherwise
appear more volatile than it actually is
Other comprehensive income (AFS debt securities) - ANSW-Current period holding gains or losses
Net Income (AFS debt securities) - ANSW-Realized gains and losses from the sale of AFS securities
Accumulated OCI (AFS debt securities) - ANSW-Net fair value adjustments to date - net holding gains and
losses to date
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash
Flows in what activities section? - ANSW-Investing
Which of the following are categories available for classifying investments in debt securities consistent
with IFRS No. 9? - ANSW-fair value through OCI
amortized cost
fair value through profit or loss
Adjustments must be made to _____ to account for the tax effects of debt investments. - ANSW-OCI and
AOCI
For each year presented, investors should disclose the following in the disclosure notes related to
investments - ANSW-Description of the valuation techniques used in the fair value measurement process
Gross realized and unrealized holding gains and losses
Aggregate fair value
Which of the following are possible categories for the purpose of classifying investments in the stock of
another company? - ANSW-no significant influence or control
control
significant influence
How is an equity investment that lacks significant influence adjusted to fair value at the end of each
reporting period? - ANSW-A valuation allowance account is increased or decreased
When equity investments that lack significant influence are sold and a fair value adjustment account has
been used to increase or decrease the carrying value of the investment, the investment account is
credited for the - ANSW-original cost of the investment
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks
significant influence over Mark Corp. James Company should - ANSW-Credit dividend revenue
