Question 1

Which of the following is true of trading debt investments?

Accepted Answer

Debt investments must be adjusted to fair value at each reporting period and any changes in value reported in the financial statements. This is required under the accounting standard known as ASC 820, which governs fair value measurement and disclosures. Therefore, option C is correct as it reflects this requirement. Option A is incorrect as there is no specific holding period requirement for trading debt investments. Option B is also incorrect as the classification of a trading debt investment as long-term or short-term depends on the intent of the investor, not the nature of the investment itself. Lastly, option D is incorrect as debt investments can be recorded at fair value or amortized cost, depending on the investor's accounting policy.

Question 2

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 (i.e., those that occur on paper due to changes in market value but have not yet been realized through sale) affect the income statement immediately.

Question 3

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 for the decrease in market value of the trading debt investment is reported as a unrealized holding loss in the Other Income and (Expenses) section of the income statement. The unrealized holding gain or loss on trading debt investments is recognized in the current period's income statement. Choices A and B are incorrect because the adjustment is not reported as stockholders' equity nor added to the Trading Debt Investments account. Choice C is incorrect because the adjustment is reported on the income statement.

Question 4

When a trading debt investment is disposed of, ________.

Accepted Answer

When a trading debt investment is disposed of, the gain or loss is calculated as the difference between the cash received and the cost of the debt investment disposed of. No unrealized holding loss is reported on the income statement since the investment is held at fair value through the income statement. The Trading Debt Investments account is credited when the investment is disposed of, not debited. The fair value adjustment is used in determining the carrying value of the investment on the balance sheet, but it is not relevant to the calculation of the gain or loss on disposal.

Question 5

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...

Question 6

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

Accepted Answer

The Fair Value Adjustment - Trading account for trading debt investments is an adjunct account if it has a debit balance. If investments have declined in value, the fair value adjustment entry will be a debit, increasing the balance in the account. Therefore, it will have a debit balance.

Question 7

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 8

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 9

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 would be used if the company were to sell the investment on the market.

Question 10

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 actually sells or disposes of an asset, not when it merely adjusts the asset's value to fair value.

Question 11

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

Accepted Answer

Fair value is the amount that would be received in an orderly transaction between market participants at the measurement date. Therefore, it is the price that would be received if the company were to sell the investment on the market, and not necessarily the price that existed at the time of acquisition or the weighted average cost of the investment. Fair value is relevant for trading debt investments as well as other types of investments.

Question 12

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 the correct method for calculating gain or loss on a trading debt security.

Question 13

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

According to the accounting standards, trading debt investments are recorded at fair value with any unrealized gains or losses included in the income statement as they arise. Therefore, the adjustment of $2,500 ($102,500 - $100,000) is reported as a $2,500 unrealized holding gain in the Other Income and (Expenses) section of the income statement. Options A, C, and D are not correct because they do not accurately reflect the accounting treatment of trading debt investments.

Question 14

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

Accepted Answer

Available-for-sale debt investments can be reported as either short-term or long-term assets on the balance sheet, depending on their intended holding period.

Question 15

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 fair value, not historical value.

Question 16

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 17

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 as a separate component of comprehensive income, not on the income statement.

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...

Question 19

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

Accepted Answer

The answer of When there is an unrealized loss on...

Question 20

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

Accepted Answer

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

Quiz 10: Investments