Question 1

Which of the following disclosures is not required for investments in securities by current GAAP?

Accepted Answer

Under current GAAP, disclosure of the circumstances leading to the decision to sell or transfer a trading security is not required. However, disclosure of the proceeds from sales and the gross realized gains and losses from the sale of available-for-sale securities, the contractual maturities of held-to-maturity debt securities, and the aggregate fair value of available-for-sale securities by major security type are required.

Question 2

The carrying value of held-to-maturity debt securities is the

Accepted Answer

The carrying value of held-to-maturity debt securities is the amortized cost, which is the original purchase amount adjusted for any amortization of premiums or discounts and any impairment losses. It is not based on market value or the lower of amortized cost or market value.

Question 3

Unrealized holding gains and losses occur because a company

Accepted Answer

The answer of Unrealized holding gains and losses occur because...

Question 4

The fair value method of accounting for investments was proposed to overcome which issues associated with the prior use of lower of cost or market?

Accepted Answer

The fair value method was proposed to address issues of relevance and liquidity. It provides more timely information about the current value of investments, making financial statements more relevant to users and reflecting the liquidity of the investments more accurately.

Question 5

Permanent value declines in available-for-sale securities should be

Accepted Answer

Permanent value declines in available-for-sale securities should be included in income as a realized loss. This is because available-for-sale securities are not held until maturity and therefore any declines in their value should be recognized in the income statement. The allowance account is used for temporary declines in value, while amortization over the remaining life of the security is not appropriate for permanent declines in value.

Question 6

On July 1, 2010, Mark Company purchased Robert Company's six-year 9% bonds with a face value of $200, 000 for $196, 000, which included $6, 000 of accrued interest.The bonds, which mature on March 1, 2016, are to be held to maturity and pay interest semiannually on March 1 and September 1.Mark uses the straight-line method of amortization.The amount of income Mark should report for the calendar year 2010 as a result of this investment would be

Accepted Answer

The answer of On July 1, 2010, Mark Company purchased...

Question 7

On July 1, 2010, Triangle, Inc.purchased Circle Company's five-year 12% bonds with a face value of $500, 000 for $569, 000, which included $25, 000 of accrued interest.The bonds, which mature on February 1, 2015, are to be held to maturity and pay interest on February 1 and August 1.Triangle uses the straight-line method of amortization.The amount of income that Triangle would report for the calendar year 2010 as a result of this long-term investment would be

Accepted Answer

The bonds were purchased for $569,000 which is $69,000 more than the face value of $500,000. This extra $69,000 is the premium paid by Triangle to Circle. The premium will be amortized (spread out) over the life of the bonds by the straight-line method.

Premium = $69,000
Number of years until maturity = 5
Annual amortization = Premium / Number of years until maturity
Annual amortization = $69,000 / 5 = $13,800

Triangle purchased the bonds on July 1, 2010, so they will receive interest payments on August 1, 2010, and February 1, 2011. The interest received on August 1, 2010, will include $25,000 of accrued interest that was included in the purchase price.

Interest received on August 1, 2010
= Face value x Interest rate x Time
= $500,000 x 12% x (2/12) (for 2 months)
= $10,000

Total income received in 2010
= Interest received on August 1, 2010 + Accrued interest included in purchase price
= $10,000 + $25,000 = $35,000

Annual amortization of premium = $13,800
Total amortization for 2010 (from July 1 to December 31) = (Premium / Number of years) x (Number of months / Total months in a year)
Total amortization for 2010 = ($69,000 / 5) x (6 / 12) = $20,700

Income reported for 2010 = Total income received in 2010 - Total amortization for 2010
Income reported for 2010 = $35,000 - $20,700 = $14,300

Therefore, Triangle would report an income of $14,300 for the calendar year 2010. However, since the question is asking for the amount of income resulting from the long-term investment, we need to divide the total amortization by 2 (for the two interest payments received in 2010) and add that to the income reported.

Adjusted income reported for 2010 = Income reported for 2010 + (Total amortization for 2010 / 2)
Adjusted income reported for 2010 = $14,300 + ($20,700 / 2) = $25,200

Thus, the correct answer is B) $25,200.

Question 8

Acquisition of greater than 20% of the outstanding stock of a company normally suggests the use of the

Accepted Answer

When acquiring greater than 20% of the outstanding stock of a company, the equity method is typically used. This method is used to account for investments where the investor has significant influence but not control over the investee. With the equity method, the investor records their share of the investee's profits and losses on their own financial statements. The consolidation method would be used if the investor has control over the investee (usually achieved through owning greater than 50% of the outstanding stock). The fair value method is typically used for investments in financial instruments that are actively traded, and the straight-line method is a depreciation method used for tangible assets.

Question 9

Investment securities are classified based upon management's intent.This may present difficulties to readers of financial statements because

Accepted Answer

Management's judgment of intent and ability may vary from company to company, making it difficult for readers of financial statements to compare the classification of investment securities across different companies.

Question 10

On January 1, 2010, New Company purchased $200, 000 of ten-year 10% bonds of Old Company for $226, 840.Interest is payable annually.The effective yield on the investment is 8%.What is the balance in New's investment in held-to-maturity bonds account (rounded to the nearest dollar, if necessary)at December 31, 2011?

Accepted Answer

The answer of On January 1, 2010, New Company purchased...

Question 11

On July 1, 2010, Tom Company purchased $60, 000 of ten-year 6% bonds of Sawyer, Inc., for $51, 850, to be held to maturity.Interest is payable semiannually on June 30 and December 31.The effective yield on the investment is 8%.What amount of interest revenue should Tom record for the six-month period ended December 31, 2010?

Accepted Answer

The answer of On July 1, 2010, Tom Company purchased...

Question 12

For available-for-sale securities, a decline in value due to a temporary decline in market value below cost is

Accepted Answer

For available-for-sale securities, a temporary decline in market value below cost is recognized in other comprehensive income (OCI) and reported as a separate component of stockholders' equity on the balance sheet, rather than through the income statement. This approach reflects the temporary nature of the decline and the intention not to sell the securities in the short term.

Question 13

When transferring investments between categories, unrealized holding gains for securities transferred from trading to available-for-sale must be

Accepted Answer

When securities are transferred from trading to available-for-sale, unrealized holding gains are not realized on the income statement but are recognized and reported in other comprehensive income, not affecting net income until the securities are sold.

Question 14

A major controversy surrounding fair value accounting for investments is that

Accepted Answer

Fair value accounting is required for all trading securities and available-for-sale securities, but is only suggested for held-to-maturity securities. This has been a controversial issue because some argue that fair value accounting can lead to volatility in financial statements and may not accurately reflect the true value of investments. However, others argue that fair value accounting provides more transparency and reflects current market conditions. Overall, the decision to use fair value accounting for investments depends on the specific circumstances and objectives of the company.

Question 15

A transfer of a security between categories is accounted for at the

Accepted Answer

A transfer of a security between categories usually involves a change in the measurement method, and therefore it should be accounted for at fair value. This fair value should be the current market value of the security on the date of the transfer.

Question 16

Which type of investment in securities must always be classified as a current asset?

Accepted Answer

Trading securities must always be classified as a current asset as they are held for the purpose of buying and selling in the near term and therefore are expected to be liquidated within the next year. Held-to-maturity debt securities and available-for-sale securities, on the other hand, may be classified as current or long-term assets depending on their maturity and the entity's intentions for holding them.

Question 17

The use of the effective interest method to amortize a discount associated with the acquisition of an investment in bonds results in

Accepted Answer

The effective interest method results in a varying amount of interest revenue each period because it applies a constant interest rate to the carrying amount of the bond, which changes over time as the discount is amortized.

Question 18

The Copper Company has a bond investment classified as held to maturity, which has a carrying value of $62, 000 and a fair value of $24, 000.The decline in value is considered as other than temporary.Copper should record the decline as

Accepted Answer

For held-to-maturity securities, a decline in fair value below the carrying amount that is considered other than temporary is recognized in earnings, which means recording it as a realized loss. This is done by debiting a loss account and crediting the investment account to reflect the decrease in the investment's value.

Question 19

All of the following statements regarding held-to-maturity debt securities are true except

Accepted Answer

Held-to-maturity debt securities are reported at amortized cost on the balance sheet, not at market value.

Question 20

When selecting the appropriate accounting for held-to-maturity securities, the company must

Accepted Answer

Held-to-maturity securities are debt instruments that a company has the positive intent and ability to hold to maturity. Equity instruments do not have a maturity date, so they cannot be classified as held-to-maturity.

Quiz 15: Investments