A firm purchased bonds to be classified as an investment in securities available-for-sale.The bonds were purchased at a premium.Assume the market price of the bond is volatile.Given these facts,which of the following is correct?

Question

Quizplus · Accepted Answer

When bonds are classified as available-for-sale, any changes in market value affect the valuation allowance account, which is used to adjust the carrying value of the investment. In this scenario, since the bonds were purchased at a premium, the original cost must be adjusted for amortization of the premium. Therefore, the ending valuation allowance account balance will depend on both the ending market value and the original cost adjusted for the amortization of premium. Option A is incorrect because cash interest received each year will be equal to the interest revenue recognized. Option B is incorrect because the ending valuation allowance account balance only depends on ending market value and original cost adjusted for amortization of premium, not just original cost and ending market value. Option D is incorrect because a premium is still a factor for available-for-sale securities, even if they are not classified as held-to-maturity.

A Firm Purchased Bonds to Be Classified as an Investment