Question 1

The fair value of an investment is the price that ________.

Accepted Answer

The fair value of an investment is the price that would be received if the company were to sell the investment on the market. It is not necessarily equal to the price at the time of acquisition or the weighted average cost of the investment. Fair value is relevant for both trading and non-trading investments, including debt investments.

Question 2

If the Fair Value Adjustment - Trading account for trading debt investments has a debit balance,it is ________.

Accepted Answer

A debit balance in the Fair Value Adjustment - Trading account indicates that the fair value of the trading debt investments has increased. Therefore, this debit balance is added to the Trading Debt Investment account to determine the carrying value.

Question 3

The fair value of a trading debt security is the price that would be used if the company were to sell the investment on the market.

Accepted Answer

The fair value of a trading debt security is indeed the price that the company would receive if they were to sell the investment on the market. This is because trading securities are securities that the company plans on selling in the near future, and as such their fair value is based on their market value.

Question 4

Which of the following is TRUE of the Fair Value Adjustment - Trading account for trading debt investments?

Accepted Answer

The answer of Which of the following is TRUE of...

Question 5

Littlefield Industries purchased a bond on September 1 of the current year for $200,000 and classified the investment as trading debt.The market value of the trading debt investment at year-end is $196,000.The adjustment is ________.

Accepted Answer

The adjustment is reported as an unrealized holding loss in the Other Income and (Expenses) section of the income statement because Littlefield Industries classified the bond as trading debt. Trading debt is a category of debt securities that companies hold with the intention of selling them for a profit in the short term. Therefore, the decrease in the value of the bond (from $200,000 to $196,000) represents an unrealized loss because the bond has not been disposed of. This unrealized loss is reported in the income statement as part of other income and (expenses). Thus, choice D is correct.

Question 6

Worldwide Enterprises purchased a bond on June 30 of the current year for $100,000 and classified the investment as trading debt.The market value of the trading debt investment at year-end is $102,500.The adjustment is ________.

Accepted Answer

The adjustment for the unrealized holding gain on the trading debt investment is reported as a $2,500 unrealized holding gain in the Other Income and (Expenses) section of the income statement. This is because trading debt securities are classified as investments that are bought and held primarily for the purpose of selling them in the near term to generate profits from short-term price changes. Thus, any changes in the market value of the trading debt investment during the year are recognized as gains or losses on the income statement. The other choices are not correct as they do not reflect the appropriate accounting treatment for trading debt investments.

Question 7

For trading debt investments,provide the following:
• Reporting method used
• How unrealized holding gain or loss is reported
• Balance sheet effects
• Income statement effects
 $$\begin{array} { | l | l | } 
\hline \text { Trading Debt Investments: } &\quad\quad\quad \
\hline \text { Reporting method used } & \
\hline \text { How unrealized holding } & \
\text { gain or loss is reported } & \
\hline \text { Balance sheet effects } & \
\hline \text { Income statement effects } & \
\hline
\end{array}$$

Accepted Answer

The answer of For trading debt investments,provide the following:
• Reporting...

Question 8

On October 1,2018,North Co.invested excess cash of $80,000 by purchasing bonds of South Inc.At year-end,December 31,2018,the market price of the bonds was $77,000.The investment is categorized as a trading debt investment.Journalize the adjusting entry needed at December 31,2018.Omit explanation.

Accepted Answer

The answer of On October 1,2018,North Co.invested excess cash of...

Question 9

On May 18,2018,Fran Co.invested excess cash of $50,000 by purchasing bonds of Hans Inc.At year-end,December 31,2018,the market price of the bonds was $52,000.The investment is categorized as a trading debt investment.Journalize the adjusting entry needed at December 31,2018.Omit explanation.

Accepted Answer

The answer of On May 18,2018,Fran Co.invested excess cash of...

Question 10

Which of the following is TRUE of trading debt investments?

Accepted Answer

Debt investments must be adjusted and reported at fair value at the end of each period according to the fair value accounting standard. The other choices are not true as debt investments can be held for a short or long term basis, and they may be recorded at either historical cost or fair value, depending on the accounting method used.

Question 11

When a trading debt security is disposed,the fair value adjustment is used in determining the calculation of the gain or loss on disposal.

Accepted Answer

When a trading debt security is disposed, the fair value adjustment is ignored in determining the calculation of the gain or loss.

Question 12

Global Commerce Corporation purchased trading debt investments for $49,000 on December 31,2018.There is a decrease of $3800 in the fair value of the trading debt investments by the end of the year 2019.Which of the following is the correct journal entry?

Accepted Answer

The answer of Global Commerce Corporation purchased trading debt investments...

Question 13

Unrealized holding gains or losses on trading debt investments are reported in the ________.

Accepted Answer

Unrealized holding gains or losses on trading debt investments are reported in the income statement, specifically in the "other income and (expenses)" section, because they represent changes in the fair value of the investments that have not yet been realized through a sale.

Question 14

When there is an unrealized loss on trading debt investments,the ________ will decrease.

Accepted Answer

Unrealized losses on trading debt investments are recognized as a reduction of the fair value of the investments held in the portfolio, which ultimately results in a decrease in the value of the portfolio. This decrease in value is reported as a loss on the income statement and is reflected as a reduction in the total equity of the company. Therefore, when there is an unrealized loss on trading debt investments, the total equity will decrease. The other options (B, C, and D) are not impacted by unrealized losses on trading debt investments.

Question 15

When a trading debt security is disposed of,the amount of gain or loss is calculated as the difference between the cash received and the cost of the debt security disposed of.

Accepted Answer

This is a correct statement. The gain or loss on the disposal of a debt security is calculated as the difference between the cash received from the sale and the cost of acquiring the security.

Question 16

Realized gains or losses occur when a company adjusts an asset to fair value but has not yet disposed of the asset.

Accepted Answer

Realized gains or losses occur when a company disposes of the asset.

Question 17

All available-for-sale debt investments are reported as long-term assets on the balance sheet.

Accepted Answer

All available-for-sale debt investments are reported as current assets on the balance sheet if the business expects to sell them within one year.

Question 18

The unrealized holding gains and losses on available-for-sale debt investments are reported on the income statement.

Accepted Answer

Unrealized holding gains and losses on available-for-sale debt investments are reported in other comprehensive income on the balance sheet rather than the income statement. They are only realized and reported in the income statement when the investment is sold.

Question 19

Companies make a year-end adjustment of the trading debt investment to bring the account to historical value.

Accepted Answer

Companies make a year-end adjustment of the trading debt investment to bring the account to market value.

Question 20

When a trading debt investment is disposed of,________.

Accepted Answer

When a trading debt investment is disposed of, the amount of gain or loss is calculated as the difference between the cash received and the cost of the debt investment disposed of. This calculation does not involve the unrealized holding loss or fair value adjustment accounts. The Trading Debt Investments account is credited, not debited, when the investment is disposed of.

Quiz 15: Investments