978-0134486833 Test Bank Chapter 10 Part 6

2) 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.

3) Companies make a year-end adjustment of the trading debt investment to bring the account to

historical value.

4) Realized gains or losses occur when a company adjusts an asset to fair value but has not yet disposed

of the asset.

5) 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.

6) When a trading debt security is disposed, the fair value adjustment is used in determining the

calculation of the gain or loss on disposal.

7) Which of the following is true of trading debt investments?

A) They are held for more than two years.

B) They are generally recorded as long-term investments.

C) They must be adjusted and reported at fair value at the end of each period.

D) They are always reported on the balance sheet at their historical cost.

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

A) existed at the time of acquisition

B) would be received if the company were to sell the investment on the market

C) is always equal to the weighted average cost of the investment

D) is not relevant for trading debt investments

9) Unrealized holding gains or losses on trading debt investments are reported in the ________.

A) current assets section of the balance sheet

B) operating expenses section of the income statement

C) other income and (expenses) section of the income statement

D) accumulated other comprehensive income section of stockholders‘ equity

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

A) total equity

B) cash

C) total liabilities

D) long-term investments

11) 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?

A)

Trading Debt Investments

3800

Unrealized Holding Loss—Trading

3800

B)

Unrealized Holding Loss—Trading

3800

Retained Earnings

3800

C)

Unrealized Holding Loss—Trading

3800

Fair Value Adjustment—Trading

3800

D)

Fair Value Adjustment—Trading

3800

Unrealized Holding Loss—Trading

3800

12) Which of the following is true of the Fair Value Adjustment – Trading account for trading debt

investments?

A) It will always have a credit balance.

B) It will always have a debit balance.

C) It is considered as an adjunct account if it has a credit balance.

D) It is considered as an adjunct account if it has a debit balance.

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 ________.

A) reported as a separate component of stockholders’ equity

B) reported as a $2,500 unrealized holding gain in the Other Income and (Expenses) section of the income

statement

C) not reported on the income statement because the market value is greater than the cost

D) subtracted from the Trading Debt Investment account

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 ________.

A) reported as a separate component of stockholders’ equity

B) added to the Trading Debt Investments account

C) not reported on the income statement because the bond has not been disposed of

D) reported as a $4,000 unrealized holding loss in the Other Income and (Expenses) section of the income

statement

15) If the Fair Value Adjustment – Trading account for trading debt investments has a debit balance, it is

________.

A) considered to be a contra account

B) subtracted from the Trading Debt Investment account to determine carrying value

C) added to the Trading Debt Investment account to determine carrying value

D) reported in the other income and expenses section of the income statement

16) When a trading debt investment is disposed of, ________.

A) an unrealized holding loss is reported on the income statement

B) the Trading Debt Investments account is debited

C) the amount of gain or loss is calculated as the difference between the cash received and the cost of the

debt investment disposed of

D) the fair value adjustment is used in determining the calculation of the gain or loss

17) 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.

18) 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.

19) For trading debt investments, provide the following:

• Reporting method used

• How unrealized holding gain or loss is reported

• Balance sheet effects

• Income statement effects

Trading Debt Investments:

Reporting method used

How unrealized holding

gain or loss is reported

Balance sheet effects

Income statement effects

Trading Debt Investments:

Reporting method used

Fair value

How unrealized holding

gain or loss is reported

Included in net income

Balance sheet effects

The investment is reported as a current asset

on the balance sheet.

Income statement effects

Interest revenue is reported on the income

statement.

Diff: 2

LO: 10-4

AACSB: Application of knowledge

AICPA Functional: Measurement

PE Question Type: Application

H2: Trading Debt Investments

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

21) The unrealized holding gains and losses on available-for-sale debt investments are reported on the

income statement.

22) The unrealized holding gains and losses on available-for-sale debt investments are recorded as an

adjustment to the Unrealized Holding Gain—Available-for-Sale account or Unrealized Holding Loss—

Available-for-Sale account.

23) The Unrealized Holding Gain—Available-for-Sale account and Unrealized Holding Loss—Available-

for-Sale account are included the Other Income and (Expenses) section of the income statement.

24) The fair value method is used to account for available-for-sale debt investments.

25) Unrealized gains or losses on available-for-sale debt investments occur when a company adjusts the

investment to ________.

A) fair value but has not yet disposed of the asset

B) fair value when an asset is disposed

C) average value but has not yet disposed of the asset

D) average value when an asset is disposed

26) Realized gains or losses on available-for-sale debt investments represent the difference between the

________.

A) historical cost and the average market value of the investment

B) fair value and the current market value of the investment

C) cash received at time of disposition and the fair value of the investment

D) cash received at time of disposition and the cost of the investment

27) Which of the following is true of available-for-sale (AFS) debt investments?

A) They are always reported as current assets in the balance sheet.

B) They are always reported as long-term assets in the balance sheet.

C) They are reported as current assets on the balance sheet only if the business expects to sell them within

the first two years.

D) They are reported as long-term assets on the balance sheet only if they are planned to be held for

longer than a year.

28) All available-for-sale (AFS) debt investments are reported on the balance sheet at ________.

A) historical cost

B) replacement cost

C) current market value

D) net realizable value

29) If there is an unrealized holding gain on available-for-sale debt investments, it is reported ________.

A) as an adjustment to stockholders’ equity on the balance sheet

B) as a debit to the long-term liabilities

C) as a separate line item on the income statement

D) as a credit to the short-term assets

30) Which of the following is included in comprehensive income?

A) Foreign currency translation adjustments

B) Owners’ investments

C) Purchase of capital assets

D) Payment of dividends

31) Which of the following is included in comprehensive income?

A) Owners‘ investments

B) Purchase of capital assets

C) Preferred dividends

D) Deferred gains or losses from derivatives