Question 1

Which of the following statements regarding trading debt securities is false?

Accepted Answer

Fair value adjustments for trading debt securities are recognized in net income, not in other comprehensive income.

Question 2

Where are changes in fair value for trading debt securities reported?

Accepted Answer

The answer of Where are changes in fair value for...

Question 3

Realized gains and losses occur when a company holds securities that experience a change in fair value.

Accepted Answer

Realized gains and losses occur when a company sells securities, not just when there is a change in fair value while holding them.

Question 4

If a debt security is not classified as held-to-maturity or trading, then it is classified as an available-for-sale security.

Accepted Answer

Debt securities not classified as held-to-maturity or trading are categorized as available-for-sale, allowing them to be sold before maturity without the intent to trade frequently.

Question 5

Goo Goo Enterprises invested in the bonds of Greater Glouster. These bonds pay interest of 2%. The effective rate of interest for similar bonds on the date of investment was 6%. Did Goo Goo purchase the bonds at a discount or premium?

Accepted Answer

The bonds were purchased at a discount because the market rate of 6% exceeds the stated rate of 2%.

Question 6

Cox Corporation invested in the bonds of Latif Industries on January 1, 2018. These 10 year, $100,000 bonds pay interest of 6% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

Accepted Answer

The purchase price of the bonds is calculated using the present value of the bond's cash flows, which include the present value of the interest payments and the present value of the principal amount, discounted at the effective interest rate of 4%. The present value of the interest payments ($6,000 annually) and the principal ($100,000) at 4% results in a purchase price of $116,351.

Question 7

Investments in debt securities that cannot be readily classified in two reporting categories are classified as ________.

Accepted Answer

Investments in debt securities that do not fit the criteria for trading or held-to-maturity are classified as available-for-sale securities.

Question 8

Price Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 60 year, $600000 bonds pay interest of 3% every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the purchase price of these bonds?

Accepted Answer

The purchase price of the bonds is calculated using the present value of the bond's cash flows, which include the present value of the interest payments and the present value of the principal amount, discounted at the effective interest rate of 4%.

Question 9

On July 1, Year 1, Fairfield Company purchased $5 million of Hampton Corporation's 6% bonds for $3,932,522. The bonds were purchased to yield 8% interest and were classified as held-to-maturity securities. The bonds mature in 25 years and pay interest annually on July 1. Assuming that Fairfield uses the effective interest method of amortization, what amount should it report for its investment in bonds on December 31, Year 1? (Round all calculations to the nearest cent, and your final answer to the nearest dollar.)

Accepted Answer

The correct answer is B: $3,939,823.The effective interest method of amortization allocates the difference between the purchase price and the maturity value of the bonds over the life of the bonds. The amount of interest expense for the first six months is $3,932,522 * 8% * 6/12 = $164,250. The amount of amortization for the first six months is $3,932,522 * (8% - 6%) * 6/12 = $3,750. The carrying value of the investment on December 31, Year 1 is $3,932,522 + $164,250 - $3,750 = $3,939,823.

Question 10

Which of the following statements regarding available-for-sale debt securities is true?

Accepted Answer

Fair value adjustments for available-for-sale debt securities are recorded in other comprehensive income, not directly in net income.

Question 11

Cassa & Associates purchased the bonds of JayBird. These bonds pay 6% interest semi-annually. The effective rate of interest at the date of investment was 3%. Did Cassa & Associates purchase these bonds at a discount or premium?

Accepted Answer

The bonds were purchased at a premium because the stated rate (6%) exceeds the market rate (3%), meaning the bonds offer a higher return than the current market rate, making them more valuable.

Question 12

Which of the following is a debt security that a company intends to hold only for the short term?

Accepted Answer

A trading security is a debt security that a company intends to hold for a short period, typically to profit from short-term price movements.

Question 13

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $300,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. What is the total amount paid by Ellucian for the City of Westminster bonds?

Accepted Answer

Ellucian paid the par value of $300,000 plus accrued interest for three months (January 1 to April 1) at 2% annual interest, which is $300,000 * 2% * (3/12) = $1,500. Total paid = $300,000 + $1,500 = $301,500.

Question 14

Which of the following is a debt security for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid?

Accepted Answer

Held-to-maturity securities are debt securities for which management has both the positive intent and ability to hold the debt investment until all principal and interest is fully paid.

Question 15

Jules & Associates purchased the bonds of Jay Bird Retailers during the year. Jules intends to hold onto these bonds to collect all principal and interest, but due to financial constraints, will most likely have to sell this investment on the open market within the next year. How should Jules classify this investment?

Accepted Answer

Since Jules intends to sell the bonds within the next year due to financial constraints, the investment should be classified as available-for-sale, which is used for debt investments that are not classified as held-to-maturity or trading.

Question 16

Bateman Enterprises invested in the bonds of Greater Gloucester on January 1, 2018. These 10-year, $300,000 bonds pay interest of 3% with semiannual payments every June 30 and December 31. The effective rate of interest for similar bonds on January 1 was 4%. What is the semi-annual interest payment received by Bateman for these bonds?

Accepted Answer

The semi-annual interest payment is calculated as the face value of the bonds multiplied by the nominal interest rate divided by two (since payments are semiannual). Thus, $300,000 * 3% / 2 = $4,500.

Question 17

On January 1, Year 1, Gibson Corporation purchased bonds issued by Williamson Company. These bonds were classified as held-to-maturity securities. The face value of these bonds is $100,000, pay 8% interest and were purchased to yield 6%. The bonds mature in 10 years and pay interest on an annual basis. If Gibson Corporation paid $114,720 for these bonds, how much interest revenue should it report on the bonds at December 31, Year 1? Assume that Gibson used the effective interest method.

Accepted Answer

Under the effective interest method, interest revenue is calculated based on the carrying amount of the bond and the yield rate. The carrying amount at the beginning of Year 1 is $114,720, and the yield rate is 6%. Therefore, the interest revenue for Year 1 is $114,720 * 6% = $6,883.

Question 18

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $600,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. Ellucian's fiscal year ends on December 31. What is Ellucian's net interest revenue for 2018?

Accepted Answer

Ellucian receives two interest payments in 2018: $6,000 on June 30 and $6,000 on December 31, totaling $12,000. However, since Ellucian paid accrued interest for the period from January 1 to March 31, which is $3,000, the net interest revenue for 2018 is $12,000 - $3,000 = $9,000.

Question 19

On April 1, 2018, Ellucian Corporation invested in the bonds issued by the City of Westminster on January 1, 2018. These 10-year, $700,000 bonds pay interest of 2% with semiannual payments every June 30 and December 31. Ellucian paid par value plus accrued interest. What is the amount of accrued interest paid at the time of purchase?

Accepted Answer

The bonds pay 2% annual interest, which is $14,000 per year ($700,000 * 2%). Since interest is paid semiannually, each payment is $7,000. Ellucian purchased the bonds on April 1, 2018, so they owe accrued interest for 3 months (January to March), which is $3,500 ($7,000 * 3/6).

Question 20

A company generally classifies securities as available-for-sale when it plans to actively buy and sell securities with the objective of generating a gain on the sale.

Accepted Answer

Available-for-sale securities are not primarily intended for active trading to generate short-term gains; they are typically held for an indefinite period and can be sold in response to liquidity needs or changes in interest rates.

Quiz 16: Investing Assets