Question 1

For trading debt investments,provide the following:
• Reporting method used
• How unrealized holding gain or loss is reported
• Balance sheet effects
• Income statement effects

Accepted Answer

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

Question 2

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

The adjustment is reported as a $2,500 unrealized holding gain in the Other Income and (Expenses) section of the income statement. This is because the investment is classified as trading debt, which means it is held for short-term profit. Therefore, any changes in market value are recognized in the income statement as unrealized gains or losses. Since the market value has increased, the adjustment is an unrealized holding gain.

Question 3

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 way to calculate the gain or loss on disposal of a trading debt security.

Question 4

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 5

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 6

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 7

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 excess cash of...

Question 8

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

Accepted Answer

The fair value of an investment is the price that would be received if the company were to sell the investment on the market. It is not necessarily the same as the price at the time of acquisition or the weighted average cost, and it is relevant for both trading and non-trading debt and equity investments.

Question 9

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 excess cash of...

Question 10

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 decrease in fair value of trading debt investments is recognized as a loss and recorded with a debit to the Loss on Trading Debt Investments account and credited to the Trading Debt Investments-Fair Value Adjustment account. Therefore, the correct journal entry is:
Loss on Trading Debt Investments 3,800
Trading Debt Investments-Fair Value Adjustment 3,800
To record the decrease in fair value of trading debt investments as of December 31, 2019.

Question 11

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 market value.

Question 12

When a trading debt investment is disposed of,________.

Accepted Answer

When a trading debt investment is disposed of, the amount of gain or loss is calculated as the difference between the cash received and the cost of the debt investment disposed of. This amount is reflected in the income statement. The Trading Debt Investments account is decreased and the Cash account is increased. The fair value adjustment is already reflected in the cost of the investment, so it is not used in determining the gain or loss on disposal. An unrealized holding loss is reported when the fair value of the investment decreased, but this is not related to disposal.

Question 13

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 based on the market price, so if the company were to sell the investment, the fair value would be the price received in the sale. This is in contrast to the amortized cost, which is based on the initial price paid for the security and is used for held-to-maturity investments.

Question 14

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 is recognized as an unrealized holding loss in the Other Income and (Expenses) section of the income statement, because the bond has not been disposed of and remains a trading debt investment. Therefore, the correct choice is option D.

Question 15

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

Accepted Answer

All available-for-sale debt investments are reported as current assets on the balance sheet if the business expects to sell them within one year.

Question 16

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 income statement, specifically in the "other income and (expenses)" section, because they represent changes in the fair value of the investments that have not yet been realized through a sale.

Question 17

The unrealized holding gains and losses on available-for-sale debt investments are reported on the income statement.

Accepted Answer

Unrealized holding gains and losses on available-for-sale debt investments are reported on the balance sheet as a component of other comprehensive income, not on the income statement. They are only realized and reported on the income statement when the investment is sold.

Question 18

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 19

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

Accepted Answer

Unrealized losses on trading debt investments are recorded as a reduction in the fair value of the investment, which in turn reduces the value of the asset on the balance sheet. This reduction in value directly affects total equity, as it lowers the amount of assets available to cover the liabilities and equity of the company.

Question 20

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 disposes of the asset.

Quiz 10: Investments

For trading debt investments,provide the following: • Reporting method used • How unrealized holding gain or loss is reported • Balance sheet effects • Income statement effects