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?
How can an investor estimate the fair value of corporate bonds that are not publicly traded?
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Which of the following are correct regarding the financial statement presentation of HTM securities?
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What results from holding bonds during periods in which their fair value changes?
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Which conditions must be present for a debt security to be classified as 'held-to-maturity'?
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What would the journal entry include credits of when Marian Company sells an HTM investment for $520,000?
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If a company holds bonds that are not actively traded, it can estimate the fair value of those bonds by using _____ techniques.
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Cash flows from buying and selling held-to-maturity securities are typically classified as _____ activities on the Statement of Cash Flows.
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What does a bond incur if the market rate of interest decreases after it is purchased?
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How are trading securities typically classified in the balance sheet?
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Which characteristics support classification of investments as trading securities?
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At the end of the accounting period, trading debt securities must be adjusted to _____ value.
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What journal entry is involved when Northern Company sells bonds classified as trading securities?
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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.
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What is the result of an increase in the fair value of an investment classified as available-for-sale security?
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At the end of the reporting period, what will Northern Company report regarding their trading securities?
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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.