Lesson 5

Question 1

What is a debt security?

Answer 1

It represents a creditor relationship with another entity.

Question 2

What are the 3 categories of debt securities?

Answer 2

1. Held-to-maturity
2. Trading
3. Available-for-sale

Question 3

What is held-to-security?

Answer 3

Debt securities that the company has the positive intent and ability to hold to maturity.

Question 4

What is trading?

Answer 4

Debt securities bought and held primarily for sale in the near term to generate income on short term price differences.

Question 5

What is available-for-sale?

Answer 5

Debt securities not classified as held-to-maturity or trading securities.

Question 6

What is amortized cost?

Answer 6

It is the acquisition cost adjusted for the amortization of discount or premium.

Question 7

What is fair value?

Answer 7

It is the price that would be received to sell an asset or paid to transfer a liability in an orderly transition between market participants at the measurement date.

Question 8

What valuation do companies record held-to-maturity at?

Answer 8

At amortized cost, not fair value

Question 9

What valuation do companies record available-for-sale securities at?

Answer 9

A fair value but do not report changes in fair value as part of net income until after selling the security.

Question 10

What valuation do companies record trading securities at?

Answer 10

At fair value, with unrealized holding gains and losses reported as part of net income.

Question 11

What is a holding gain or loss?

Answer 11

It is the net change in the fair value of a security from one period to another.

Question 12

What are Investments in debt securities generally recorded at?

Answer 12

Cost including brokerage and other fees

Investments in debt securities are generally recorded at cost including brokerage commissions and taxes.

Question 13

What is accurate in accounting for investments in debt securities for discounts or premiums?

Answer 13

Any discount or premium is amortized.

Question 14

What are Debt securities that are bought and held primarily for sale in the near term are reported at?

Answer 14

Fair value

Debt securities that are bought and held primarily for sale in the near term are reported at fair value. They are also known as Trading Securities.

Question 15

An available-for-sale debt security is purchased at a discount.

What is included in an entry to record the amortization of the discount?

-Debit to Interest Revenue
-Debit to the Discount Account
-Debit to Interest Payable
-Debit to Debt Investments

Answer 15

Debit to Debt Investments

Question 16

On its December 31, 2020, balance sheet, Estes Co. reported its investment in trading securities, which had cost $500,000, at fair value of $475,000. At December 31, 2021 the fair value of the securities was $492,500.

What should Estes report on its 2021 income statement as a result of the increase in fair value of the investments in 2021?

-$0.00
-Unrealized loss of $7,500
-Realized gain of $17,500
-Unrealized gain of $17,500

Answer 16

Unrealized gain of $17,500

A holding gain or loss is the net change in the fair value of a security from one period to another. The unrealized gain is computed as follows: $492,500 - $475,000 = $17,500