Question 1

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 2

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

Accepted Answer

The unrealized holding gains and losses on available-for-sale debt investments are reported in the balance sheet as a component of accumulated other comprehensive income until realized. They are not reported on the income statement unless they are realized through a sale or impairment.

Question 3

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 would be reported as a $2,500 unrealized holding gain in the Other Income and (Expenses) section of the income statement, since the investment is classified as trading debt. It is important to note that trading debt investments are held for the purpose of selling them in the short term, and any changes in market value are recognized in the income statement as unrealized gains or losses.

Question 4

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, it is added to the Trading Debt Investment account to determine the carrying value.

Question 5

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 6

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 7

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 statement is true. The gain or loss on a disposed trading debt security is calculated as the difference between the cash received (proceeds) and the cost (basis) of the debt security disposed of.

Question 8

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

According to the information given, the bond's market value at year-end is less than the purchase price, indicating an unrealized loss. This loss should be recognized in the income statement as a component of Other Income and (Expenses) under the header of unrealized holding gains and losses. Choice A is not a correct answer because the adjustment is not reported as a separate component of stockholders' equity. Choice B is not a correct answer because the adjustment should not be added to the Trading Debt Investments account. Choice C is not a correct answer because the bond does not have to be disposed of to recognize an unrealized loss.

Question 9

Which of the following is TRUE of trading debt investments?

Accepted Answer

Trading debt investments are adjusted and reported at fair value at the end of each reporting period. This is because they are typically bought and sold for short-term profit, and their value can fluctuate over time.

Question 10

For trading debt investments,provide the following:
• Reporting method used
• How unrealized holding gain or loss is reported
• Balance sheet effects
• Income statement effects

Accepted Answer

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

Question 11

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 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 "other income and (expenses) section of the income statement." This is because trading securities are marked to market, and any unrealized gains or losses are recognized in earnings immediately.

Question 14

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 15

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, regardless of the price at which it was acquired. This is because the fair value reflects the current market conditions and is used to provide relevant information about the value of the investment for decision-making purposes. The weighted average cost of an investment may be used for some accounting purposes, but it does not necessarily reflect the current market value. The relevance of fair value applies to both trading and non-trading debt investments.

Question 16

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 17

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. The unrealized holding loss is reported on the income statement only if the trading debt investment is still held at year-end and it has decreased in value. The Trading Debt Investments account is credited when the investment is disposed of, and the fair value adjustment is used to adjust the value of the investment to its fair value at the end of the period. However, this fair value adjustment is not used in determining the calculation of the gain or loss on disposal.

Question 18

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 19

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

Accepted Answer

Unrealized loss on trading debt investments is recorded as a decrease in the fair value of the investment, which in turn decreases the value of the asset and hence the total equity.

Question 20

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

This statement is true. The fair value of a trading debt security is the price that would be received if the company were to sell the investment on the market. This value is determined based on the current market conditions and is used to determine the gain or loss on the investment.

Quiz 15: Investments