Investments

Question 1

Debt Securities represents

Answer 1

A creditor relationship w/ another entity

Question 2

Debt Investment classification categories

Answer 2

• Held to Maturity
• Trading
• Available for sale

Question 3

Debt securities held to maturity are reported at…

Answer 3

Amortized cost

Question 4

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

Answer 4

No

Question 5

Debt securities that are available for sale are reported at…

Answer 5

Fair Value

Question 6

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

Answer 6

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

Question 7

The trading period for debt securities tend to be…

Answer 7

3 months

Question 8

Debt securities intended for trading are reported at…

Answer 8

Fair Value

Question 9

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

Answer 9

Yes, in net income

Question 10

What are the other income effects for all 3 classifications?

Answer 10

• Interest when earned
• Gains and losses from sale

Question 11

Amortized cost

Answer 11

The acquisition cost adjusted for amortization of discount or premium

Question 12

Fair value

Answer 12

The price received to sell an asset

Question 13

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

Answer 13

The positive intent and ability to hold these securities to maturity

Question 14

Why do companies use held to maturity securities?

Answer 14

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

Question 15

Amortized cost accounting recognizes…

Answer 15

Interest revenue as the primary earnings of the company

Question 16

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

Answer 16

Dr Debt Investments
Cr Cash

Question 17

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

Answer 17

Effective interest method

Question 18

J/E to record first semiannual interest payment

Answer 18

Dr Cash
Dr Debt Investments
Cr Interest Revenue

Question 19

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

Answer 19

Dr Interest Receivable
Dr Debt Investments
Cr Interest Revenue

Question 20

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

Answer 20

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

Question 21

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

Answer 21

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

Question 22

Available for sale securities are debt securities that are…

Answer 22

Neither held to maturity nor for trading

Question 23

Why do companies hold available for sale securities?

Answer 23

• 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

Question 24

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

Answer 24

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

Question 25

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

Answer 25

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

Question 26

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

Answer 26

other comprehensive gain or loss

Question 27

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

Answer 27

Dr Cash Dr Loss on Sale of Investments Cr Debt Investments

Question 28

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

Answer 28

Dr Cash Cr Gain on Sale of Investments Cr Debt Investments

Question 29

Companies use trading securities to...

Answer 29

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

Question 30

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

Answer 30

fair value, part of net income

Question 31

A holding gain or loss is the net change in...

Answer 31

the fair value of a security from one period to another

Question 32

Equity Securities

Answer 32

Represents ownership interests via stock

Question 33

The classification of equity investments depends on the...

Answer 33

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

Question 34

The fair value method is used if the investee's holding percentage is...

Answer 34

Less than 20%

Question 35

The equity method is used if the investee's holding percentage is...

Answer 35

Between 20% and 50%

Question 36

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

Answer 36

Recognized in net income

Question 37

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

Answer 37

Not recognized

Question 38

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

Answer 38

Income under the income statement

Question 39

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

Answer 39

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

Question 40

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

Answer 40

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

Question 41

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

Answer 41

significant

Question 42

Equation for computing carrying value of equity investment

Answer 42

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

Question 43

J/E to purchase equity investments

Answer 43

Dr Equity Investments [investee] Cr Cash

Question 44

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

Answer 44

Dr Equity Investments [investee] Cr Investment Income

Question 45

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

Answer 45

Dr Cash Cr Equity Investments [investee]