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Accounting > Investments > Flashcards

Investments Flashcards

Acct 202 ch 16

1
Q

Debt Securities represents

A

A creditor relationship w/ another entity

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2
Q

Debt Investment classification categories

A
  • Held to Maturity
  • Trading
  • Available for sale
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3
Q

Debt securities held to maturity are reported at…

A

Amortized cost

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4
Q

Do debt securities held to maturity recognize unrealized holding gains or losses?

A

No

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5
Q

Debt securities that are available for sale are reported at…

A

Fair Value

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6
Q

Do debt securities that are available for sale recognize unrealized holding gains or losses?

A

Yes, as other comprehensive income separate from stockholder’s equity

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7
Q

The trading period for debt securities tend to be…

A

3 months

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8
Q

Debt securities intended for trading are reported at…

A

Fair Value

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9
Q

Do debt securities intended for trading recognize unrealized holding gains or losses?

A

Yes, in net income

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10
Q

What are the other income effects for all 3 classifications?

A
  • Interest when earned
  • Gains and losses from sale
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11
Q

Amortized cost

A

The acquisition cost adjusted for amortization of discount or premium

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12
Q

Fair value

A

The price received to sell an asset

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13
Q

In order to classify a debt security as held to maturity, a company must have…

A

The positive intent and ability to hold these securities to maturity

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14
Q

Why do companies use held to maturity securities?

A
  1. To earn a spread on a difference between interest revenue and interest expense
  2. To diversity their investment portfolio
  3. To eliminate unpredictability in reported earnings or capital
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15
Q

Amortized cost accounting recognizes…

A

Interest revenue as the primary earnings of the company

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16
Q

J/E to record purchase of a bond held to maturity

A

Dr Debt Investments
Cr Cash

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17
Q

The use of the _____________ is more easily applied w/ the net method instead of using a separate discount or premium account as a valuation account

A

Effective interest method

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18
Q

J/E to record first semiannual interest payment

A

Dr Cash
Dr Debt Investments
Cr Interest Revenue

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19
Q

J/E to record accrued interest + amortization of a bond discount

A

Dr Interest Receivable
Dr Debt Investments
Cr Interest Revenue

20
Q

J/E to record sale of investment before maturity date, assuming there is a gain on sale of investments

A

Dr Cash
Cr Interest Revenue
Cr Debt Investments
Cr Gain on sale of investments

21
Q

J/Es to record sale of investment before maturity date, assuming there is a loss on sale of investments

A

Dr Cash
Dr Loss on Sale of Investments
Cr Interest Revenue
Cr Debt Investments

22
Q

Available for sale securities are debt securities that are…

A

Neither held to maturity nor for trading

23
Q

Why do companies hold available for sale securities?

A
  • Provide income + capital gains for a long period of time
  • Reduce risk by diversifying their investment portfolio
  • Provide liquidity in situations where cash is needed
24
Q

J/E to record fair value adjustment for an available for sale security, assuming a loss

A

Dr Unrealized holding gain or loss - Equity
Cr Fair Value Adjustment

25
Q

J/E to record fair value adjustment for an available for sale security, assuming a gain

A

Dr Fair Value Adjustment
Cr Unrealized holding gain or loss - Equity

26
Q

Using an unrealized holding gain or loss - Equity account means the amount is reported under…

A

other comprehensive gain or loss

27
Q

J/E for selling available for sale securities, assuming a loss on sale of investments

A

Dr Cash
Dr Loss on Sale of Investments
Cr Debt Investments

28
Q

J/E for selling available for sale securities, assuming a gain on sale of investments

A

Dr Cash
Cr Gain on Sale of Investments
Cr Debt Investments

29
Q

Companies use trading securities to…

A
  1. Generate profits from short term differences in price
  2. Provide liquidities
30
Q

Companies report trading securities at _____, with unrealized holding gains and losses reported as _______

A

fair value, part of net income

31
Q

A holding gain or loss is the net change in…

A

the fair value of a security from one period to another

32
Q

Equity Securities

A

Represents ownership interests via stock

33
Q

The classification of equity investments depends on the…

A

Percentage of the investee’s voting stock that’s held by the investor

34
Q

The fair value method is used if the investee’s holding percentage is…

A

Less than 20%

35
Q

The equity method is used if the investee’s holding percentage is…

A

Between 20% and 50%

36
Q

For holdings less than 20%, unrealized holding gains or losses are…

A

Recognized in net income

37
Q

For holdings between 20% and 50%, unrealized holding gains or losses are…

A

Not recognized

38
Q

For holdings less than 20%, dividends are reported as…

A

Income under the income statement

39
Q

J/E to record net unrealized losses to changes in fair value of securities

A

Dr Unrealized Holding Gain or Loss - Income
Cr Fair Value Adjustment

40
Q

J/E to record net unrealized gains to changes in fair value of securities

A

Dr Fair Value Adjustment
Cr Unrealized Holding Gain or Loss - Income

41
Q

If an investee has holdings between 20% and 50%, it means they have _____ influence over the company

A

significant

42
Q

Equation for computing carrying value of equity investment

A

Cost of shares +- investor’s % share of net income or loss - Dividends

43
Q

J/E to purchase equity investments

A

Dr Equity Investments [investee]
Cr Cash

44
Q

J/E to record an investee’s share of net income

A

Dr Equity Investments [investee]
Cr Investment Income

45
Q

J/E to record investee’s reduction in their investment account for dividends received

A

Dr Cash
Cr Equity Investments [investee]

Accounting (5 decks)

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