Debt Securities (Bonds) Flashcards
Where within the financial statements does a company report the Unrealized Gains/Losses in Available-for-Sale Debt Securities, and what type of account is it?
Other Comprehensive Income (OCI); an equity account.
Where within the financial statements does a company report the Unrealized Gains/Losses in Trading Debt Securities, and what type of account is it?
Net Income; a revenue account.
What is the (typical) name of the valuation account that a company uses to report the changes in fair value in Available-for-Sale Debt Securities, and what type of account is it?
Allowance for Change in Fair Value of Investments; both an adjunct & a contra account.
Which three factors determine how a company’s investments are classified & reported?
The type of security, the intent of management to hold or sell the investment, and the extent to which the investor can influence or control the investee.
If a company intends to hold a debt security for an indefinite period, how would it be classified?
An available-for-sale debt security is held indefinitely until stated otherwise.
How do minority passive & minority active investments differ?
The significance of a company’s influence over the other company causes equity securities to be classified differently.
How are the values of the different equity securities recognized on a company’s balance sheet?
Minority passive investments are recorded at fair value, minority active by using the equity method, and majority active with consolidated financial statements of both companies.
ABC Co. pays $99,000 to purchase bonds it intends to hold to maturity. The bonds have a face value of $100,000 and mature on December 31, Year 3. Interest is payable semiannually. What does the journal entry for this transaction look like?
Debit Investment in Held-to-Maturity Debt Securities for $99,000 and Credit Cash for $99,000.
What steps must be taken before (unexpectedly) selling a held-to-maturity debt security?
The amortization and interest income from the start of the year to the date of sale of the bond must be recognized if it is to be sold before maturity.
What does a company do with an Unrealized Gain/Loss in an Available-for-Sale Debt Security, and what accounts are involved?
A company must reclassify the Unrealized Gain/Loss from Accumulated Other Comprehensive Income (AOCI) into Net Income.
What is recorded as the difference between the actual cash received and interest income recognized, and what account does it directly affect?
The discount or premium amortization is the difference between the cash and recognized revenue, which directly affects the Investment in AFS Securities account associated with the bond.
