Chapter 12: Part A

Question 1

Debt

Answer 1

bonds and notes

Question 2

Equity

Answer 2

common and preferred stock

Question 3

3 types of investments for ownership less than 20%

Answer 3

Held to maturity
Trading security
Available for sale

Question 4

20% < investment < 50%

Answer 4

Equity method

Question 5

50% < investment

Answer 5

consolidation

Question 6

HTM is reported at cost

Answer 6

amortized on BS

Question 7

TS are reported @

Answer 7

face value

Question 8

AFS reported @

Answer 8

face value

Question 9

unrealized G/L of TS reported on…

Answer 9

current period earnings on IS

retained earnings @ shareholders equity

Question 10

Unrealized G/S of AFS reported on…

Answer 10

OCI (shareholder’s equity)

Question 11

investment revenue from debt

Answer 11

interest

Question 12

investment revenue from equity

Answer 12

dividends

Question 13

Fair Value option

Answer 13

when HTM & AFS become TS

Question 14

on maturity date of HTM it is called

Answer 14

principal or face amount

Question 15

journal entry for purchase of HTM

Answer 15

(debit) Investment in HTM - face amount
(credit) discount - difference
(credit) cash - amount paid, PV calculated

Question 16

Market value of a fixed HTM relative to market rate

Answer 16

opposite

Question 17

effective interest method (for discount HTM)

Answer 17

effective market rate
* outstanding balance
= investment revenue

Question 18

first entry for HTM discount bond (dec 31)

Answer 18

(debit) cash
(debit) discount
(credit) investment rev

Question 19

you do not recognize what for HTMs

Answer 19

unrealized holding gains and losses

Question 20

When the market rate of HTM decreases (making it a premium) therefore changing the FV/Pv. What do you do?

Answer 20

you do not recognize the change in FV. Instead you report it on the BS or IS, as long as temporary. The HTM will still be recorded at amortized cost (outstanding balance). not unrealized holding gains/losses

Question 21

trading securities are recorded at

Answer 21

cost = total amount paid + brokerage fees

Question 22

journal for purchase of ‘TS’

Answer 22

(debit) investment in bond
(credit) discount
(credit) cash

Question 23

recognizing revenue for ‘TS’

Answer 23

(debit) cash
(debit) discount
(credit) investment rev.

Question 24

TS is recognized by what on BS

Answer 24

fair value

Question 25

how to determine the UNrealized g/s of a TS

Answer 25

identify the amortized cost, then determine the FV adjustment (outstanding bal. - new FV value = FV adjustment)

Question 26

sale JL for TS

Answer 26

(debit) cash (debit) discount (credit) investment in bond (credit) gain on sale

Question 27

What happens when a TS is sold (gains/losses)

Answer 27

all unrealized become realized, therefore removed and on net income

Question 28

effects of TS on the IS

Answer 28

FV changes included whether unrealized or realized and does NOT affect AOCI

Question 29

effects of TS on the BS

Answer 29

FV is in current assets and does NOT affect AOCI on shareholders equity

Question 30

effects of TS on the CF

Answer 30

operating activity, unless not held for sale in near term it is investing activity

Question 31

AFS effects on IS

Answer 31

Realized on NI | Unrealized on OCI

Question 32

AFS effects on BS

Answer 32

investments at fair value | unrealized on AOCI under shareholder eq.

Question 33

AFS effects on CF

Answer 33

investing activity

Question 34

journal entry for unrealized loss in FV adj for TS

Answer 34

(debit) net unrealized holding g/s (IS) | (credit) Fair value adjustment

Question 35

new balance in FV adjst for TS

Answer 35

(debit) Fair value adjustement | credit) net unrealized holding g/l (IS

Question 36

HTM/AFS -> TS

Answer 36

unrealized g/l are recognized in current earnings

Question 37

TS -> HTM / AFS

Answer 37

all gains and losses already accounted for

Question 38

HTM -> AFS

Answer 38

no current income effect but unrealized in OCI

Question 39

AFS - > HTM

Answer 39

No current income effect, but amortize gains and losses in OCI with any bond premium/discount over remaining life of the security.

Question 40

Fair Value Option

Answer 40

unrealized gains and losses are recognized in the net income in the period which they occur. It is IRREVOCABLE.

Question 41

when HTM / AFS use Fair value option.

Answer 41

they become investing activities not operating