Chapter 14

Question 1

what are the two main ways a company raises capital?

Answer 1

• debt (bonds)
• equity (stocks)

Question 2

3 classifications of debt

Answer 2

• held to maturity
• available for sale
• trading

Question 3

3 classifications of equity

Answer 3

• < 20%
• 20 to 50%
• > 50%

Question 4

held to maturity

Answer 4

we have the intent AND ability to hold bond for its life
- account for bond at amortized cost

Question 5

accounting method for HTM debt

Answer 5

amortized cost

Question 6

available for sale

Answer 6

we cannot determine how long we will hold the bond (kind of a catch-all bucket)
- account for using the FV - OCI method

Question 7

accounting method for AFS debt

Answer 7

fair value - other comprehensive income (FV - OCI)

Question 8

trading investment

Answer 8

intent is to profit on changes in market (day trading)
- account for using FV - NI method

Question 9

accounting method for trading investment debt

Answer 9

fair value - net income (FV - NI)

Question 10

difference between AFS and trading methods

Answer 10

AFS goes to OCI and trading goes to NI

Question 11

accounting method for < 20% ownership in equity

Answer 11

fair value - net income

Question 12

accounting method for 20% to 50% ownership in equity

Answer 12

equity method

Question 13

which debt and equity situations use the fair value - net income method?

Answer 13

debt: trading investment
equity: < 20% ownership

Question 14

which situation requires no fair value adjustment?

Answer 14

HTM securities

Question 15

under the equity method, how do you account for investment earnings?

Answer 15

debit the investment and credit investment income