Finance Quiz: Debt Securities

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Questions and Answers

Securities which could be classified as held-to-maturity are?

Treasury stock

Municipal bonds (correct)

Redeemable preferred stock

Warrants

Unrealized holding gains or losses which are recognized in income are from debt securities classified as?

Available-for-sale

Trading (correct)

None of these answers are correct

Held-to-maturity

Debt securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses included as other comprehensive income are?

Trading debt securities

Never-sell debt securities

Held-to-maturity debt securities

Available-for-sale debt securities (correct)

Equity securities acquired by a corporation which are accounted for by recognizing unrealized holding gains or losses are?

Securities where a company has holdings of less than 20% Signup and view all the answers

GAAP specifies that, regarding the amortization of a premium or discount on a debt security, the?

Effective-interest method of allocation should be used but other methods can be applied if there is no material difference. Signup and view all the answers

How much did Miller pay for its 25% interest in Wall?

$172,000 Signup and view all the answers

Under the equity method, if an investee company generates net income, the investor company?

Records its proportionate share as an increase in its investment account. Signup and view all the answers

What should Pharoah report as investment revenue for 2021 if it owns 4400 of the 10000 shares?

$215,600 Signup and view all the answers

What is the amount of unrealized loss for Crane Company to appear as a component of comprehensive income for the year ending December 31, 2021?

$34,500 Signup and view all the answers

What is the amount of interest revenue recognized in 2021 related to the bonds acquired by Sheridan Company?

$41,461 Signup and view all the answers

What amount of gain or loss will Sunland Corporation report in its income statement for the year ended December 31, 2022?

$54,000 loss Signup and view all the answers

Transfers between categories are?

Accounted for at fair value for all transfers. Signup and view all the answers

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes?

A debit to Debt Investments at $315,000. Signup and view all the answers

When a company holds between 20% and 50% of the outstanding stock of an investee, which statement applies?

The investor should use the equity method unless circumstances indicate it is unable to exercise 'significant influence.' Signup and view all the answers

What amount should Sunland report in its 2021 income statement for unrealized holding loss?

$22,400 Signup and view all the answers

Unrealized gains and losses on available-for-sale securities are?

Reported on the balance sheet. Signup and view all the answers

Study Notes

Securities Classification

Held-to-maturity securities include municipal bonds.
Unrealized holding gains or losses from securities classified as trading are recognized in income.
Available-for-sale debt securities recognize unrealized gains or losses as other comprehensive income, impacting stockholders' equity.

Equity Securities

Equity securities with holdings of less than 20% are accounted for by recognizing unrealized holding gains or losses.
The effective-interest method is required for amortizing premium or discount on debt securities, but other methods can be used if results are not materially different.

Accounting Methods

Under the equity method, an investor records their share of the investee's net income as an increase in the investment account.
An investment yielding a 25% ownership results in a value of $172,000 for Miller Company regarding Wall Corporation.

Investment Revenue Reporting

Pharoah Company, holding 44% of Wildhorse Corp, reports $215,600 in investment revenue.
Unrealized loss for Crane Company’s portfolio at 12/31/2021 is $34,500 after calculation.

Interest Revenue Recognition

Sheridan Company recognizes $41,461 in interest revenue for 2021 from Adam Company's bonds when applying the effective-interest method.

Gains and Losses in Investments

Sunland Corporation's investment results in a $54,000 loss for 2022 when applying the fair value method.
Transfers between investment categories are always accounted for at fair value.

Accounting Transactions

Watt Company records the purchase of bonds for $315,000, debiting Debt Investments accordingly.
When holding 20% to 50% of investee stock, the investor uses the equity method unless unable to exercise significant influence.

Unrealized Holding Loss

Sunland Corporation shows an unrealized holding loss of $22,400 in their 2021 income statement for trading securities.
Unrealized gains and losses on available-for-sale securities are reported on the balance sheet.

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Description

Test your knowledge on the classification of debt securities, including held-to-maturity, available-for-sale, and trading categories. This quiz covers essential concepts regarding municipal bonds, unrealized holding gains, and more. Perfect for finance students and professionals alike!