Finance Chapter 12 Flashcards

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Questions and Answers

What does a bond incur if the market rate of interest rises after it is purchased?

an unrealized holding loss

If an investor has the positive intent and ability to hold a debt security until it matures, how should it be classified?

held-to-maturity security

What would the journal entry include debits of when Marian Company sells an HTM investment for $520,000?

$20,000 to discounts (correct)
$520,000 to cash (correct)
$500,000 to investments
$100,000 to fair value adjustment

How can an investor estimate the fair value of corporate bonds that are not publicly traded?

present value of the future cash flows Signup and view all the answers

Which of the following are correct regarding the financial statement presentation of HTM securities?

Gains and losses are shown in net income in the period in which the securities are sold (A), Unrealized holding gains and losses are disclosed in the notes (C) Signup and view all the answers

What results from holding bonds during periods in which their fair value changes?

unrealized holding gains and losses Signup and view all the answers

Which conditions must be present for a debt security to be classified as 'held-to-maturity'?

The investor has the ability to hold the security until maturity (A), The investor intends to hold the security until maturity (D) Signup and view all the answers

What would the journal entry include credits of when Marian Company sells an HTM investment for $520,000?

$500,000 to investments in HTM securities (B), $40,000 to gain from sale of investment (D) Signup and view all the answers

If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using _____ techniques.

present value Signup and view all the answers

Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.

investing Signup and view all the answers

What does a bond incur if the market rate of interest decreases after it is purchased?

an unrealized holding gain Signup and view all the answers

How are trading securities typically classified in the balance sheet?

current assets Signup and view all the answers

Which characteristics support classification of investments as trading securities?

Motivation to realize short-term profits (A), Frequent and active trading (C) Signup and view all the answers

At the end of the accounting period, trading debt securities must be adjusted to _____ value.

fair Signup and view all the answers

What journal entry is involved when Northern Company sells bonds classified as trading securities?

Debit to cash $680,000 (A), Debit to discount on bond investment $100,000 (B), Credit to investment in bonds $700,000 (C), Credit to fair value adjustment $80,000 (D) Signup and view all the answers

Cash flows from buying and selling debt securities classified as trading as part of normal operations typically are classified as _____ activities in the statement of cash flows.

operating Signup and view all the answers

What is the result of an increase in the fair value of an investment classified as available-for-sale security?

an increase in other comprehensive income Signup and view all the answers

At the end of the reporting period, what will Northern Company report regarding their trading securities?

Will make a fair value adjustment of $75,000 (B), Will report unrealized gains (C) Signup and view all the answers

Study Notes

Bond Market and Values

If the market interest rate rises after purchasing a bond, it results in an unrealized holding loss.
A decrease in market interest rate leads to an unrealized holding gain.

Debt Securities Classification

Securities intended to be held until maturity are classified as held-to-maturity (HTM) securities.
Conditions for classifying a debt security as HTM include the investor's intent and ability to hold it until maturity.

Accounting for HTM Securities

Sales of HTM securities involve journal entries that debit cash and discounts on investment.
Gains and losses from HTM securities are recorded in net income only upon sale, while unrealized gains and losses are disclosed in notes.

Fair Value Estimation

For non-publicly traded corporate bonds, fair value can be estimated by calculating the present value of future cash flows.
Bonds not actively traded can also be valued using present value techniques.

Cash Flow Classifications

Cash flows from buying and selling HTM securities are classified as investing activities.
Trading debt securities are recognized as current assets on the balance sheet, with cash flows classified as operating activities.

Characteristics of Trading Securities

Trading securities are characterized by frequent trading and a motivation for short-term profit.
At the end of an accounting period, trading debt securities must be adjusted to fair value.

Journal Entries for Trading Securities

Common entries for selling trading securities include debiting discounts on bond investments and crediting cash for the sale price.
A fair value adjustment entry reflects changes in the market value of trading securities.

Available-for-Sale Securities

Increases in fair value for available-for-sale securities, such as those held by Porter Company, result in an increase in other comprehensive income.

Reporting for Trading Securities

Companies like Northern Company must recognize fair value adjustments for trading securities at the end of the reporting period to reflect true market value.

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Description

Test your knowledge on the key concepts from Chapter 12 of finance, focusing on bond valuation and investment classifications. These flashcards cover topics such as unrealized holding losses and held-to-maturity securities, essential for understanding fixed income investments.