Debt Investments at Fair Value

Question 1

Questions on CPA Exam:

Answer 1

• Measurement at acquisition
• While you’re holding the security
• At Sale

Question 2

Tools:

Answer 2

Journal Entries

T-Accounts

Question 3

When is a debt security in the trading category?

Answer 3

• Applies only to debt securities

- Short-term profit intent

Question 4

What is the accounting for debt securities in the trading category?

Answer 4

• Record at Fair Value (no contra account)
• Interest earned on income statement
• Holding gains and losses are recognized on the income statement
• Balance sheet: Current Asset (mostly)
• Income Statement: Interest Income and gains/loss
• Statement of Cash Flow: Operating

Question 5

A bond should be recorded at what amount on the date of purchase?

Answer 5

DR: Investment in Debt Security at Face Value
CR: Discount- Trading
CR: Cash Paid

Question 6

What is the journal entry for cash received for interest payments?

Answer 6

DB Cash
DB: Discount- Trading
CR: Interest Income

Question 7

What is the journal entry for a FV adjustment on the bond?

Answer 7

Unrealized loss/gain DB OR CR (income statement)

Investment in debt security (DB OR CR)

Question 8

What is the journal entry for AFS Debt Security?

Answer 8

DB: Investment
CR: Discount
CR: Cash

Question 9

What is the journal entry to record the interest payment on a AFS Debt Security?

Answer 9

DB: Cash
DB: Discount- AFS
CR: Interest Income

Question 10

What is the journal entry for a fair value adjustment?

Answer 10

DB: Fair Value Adjustment- AFS Debt Security

CR. Unrealized gain/loss (OCI)