Chapter 12
1. A firm initially records the purchase of marketable securities at acquisition cost, which includes the purchase
price plus any commissions, taxes, and other appropriate costs incurred.
2. The term marketable securities refers to the financial instruments that firms classify as held-to-maturity,
trading, or available-for-sale securities, recognizing that the term does not have a precise definition in U.S.
GAAP or IFRS.
3. If a held-to-maturity security is deemed to be impaired, the investor recognizes (debits) the balance sheet
carrying value of the investment and reduces (credits) an impairment loss (included in net income).
4. The future value of held-to-maturity debt securities reflects the economic opportunity cost of continuing to
hold the securities.
5. Acquisition and disposition of trading securities are usually financing activities.
6. Firms initially record trading securities at fair value, excluding transactions costs (which firms expense as
they incur them).
7. Measurement of trading securities at fair value reflects income when it occurs in the form of a change in fair
value, not when the investor realizes a gain or loss at the time of sale.
8. U.S. GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to
maturity nor trading securities as securities available-for-sale.
9. Securities available-for-sale that a firm intends to sell within one year appear in marketable securities in the
current assets section of the balance sheet.
10. The required accounting for trading securities and for securities classified as available-for-sale is the same
for the balance sheet, but differs with respect to the income statement
11. Management can sell securities with unrealized holding gains (or losses) and transfer through net income to
Retained Earnings the entire unrealized holding gain (or loss)—that is, management can affect the timing of
gain or loss recognition in net income for both securities available-for-sale and trading securities.
12. The transfer of a held-to-maturity investment in debt securities to either trading securities or securities
available-for-sale would call into question the original designation of that investment.
13. A derivative is a financial instrument whose value changes in response to changes in an underlying
observable variable, such as a stock price, an interest rate, a currency exchange rate, or a commodity price.
14. Both U.S. GAAP and IFRS require that firms record derivatives at their fair values on the balance sheet
date.
15. A derivative may have zero initial cost, but potentially large positive or negative fair values later.
16. In both U.S. GAAP and IFRS, hedge accounting is elective; firms need not designate any derivatives as
accounting hedges, regardless of the degree to which the derivatives mitigate the volatility of outcomes of other
arrangements.
17. Firms might use a particular derivative to hedge fair value and to hedge cash flows.
18. When accounting for a fair value hedge of a recognized asset or liability, at the end of each period, the firm
remeasures the hedged asset or liability to fair value and includes the resulting gain or loss in net income, and
the derivative instrument (hedging instrument) to fair value and includes the resulting loss or gain in net
income.
19. Gains and losses on derivatives not designated as hedges of a specific risk, gains and losses on fair value
hedges, and the ineffective portion of cash flow hedges affect net income simultaneously with changes in fair
value.
20. Gains and losses on effective cash flow hedges initially affect other comprehensive income, not net
income.
21. The provisions of U.S. GAAP require firms to classify marketable securities into which categories?
22. The provisions of U.S. GAAP require firms to classify marketable securities into the following categories
except
23. The provisions of IFRS require firms to classify marketable securities into which of the following
categories?
24. The provisions of IFRS require firms to classify marketable securities into which of the following categories
except
25. Alex Corporation acquires securities classified as marketable securities for $10,000. The entry is as
follows:
26. The investor recognizes dividends on equity securities as revenue when the
27. The investor recognizes interest on debt securities when
28. Barry Corporation holds equity securities earning $250 through dividend declarations and debt securities
earning $300 from interest earned and that it has not yet received these amounts in cash. The entry is as
follows:
29. DPC, an electric utility, has $100 million of bonds payable outstanding that mature in five years. The utility
acquires U.S. government securities whose periodic interest payments and maturity value exactly equal those on
the utility’s outstanding bonds. The firm intends to use the cash received from the government bonds to make
required interest and principal payments on its own bonds. The electric utility could also have used its cash to
purchase its bonds in the marketplace. Based on the above, DPC should treat these securities as
30. U.S. GAAP and IFRS require firms to measure marketable securities for which firms have an intent and
ability to hold to maturity at
31. A firm records debt securities purchased at the acquisition cost. The acquisition cost will differ from the
_______ of the debt if the __________on the bonds differs from the required ________ on the bonds at the time
the firm acquired them.
32. A firm records debt securities purchases at the acquisition cost. The firm must use the _____ method to
amortize any difference between acquisition cost and maturity value over the life of the debt as an adjustment to
_____
33. Firms sometimes acquire debt securities with the intention of holding these securities until maturity. U.S.
GAAP and IFRS require firms to measure marketable securities for which firms have an intent and ability to
hold to maturity at _____. A firm initially records these debt securities at acquisition cost. This acquisition cost
will differ from the maturity value of the debt if the coupon rate on the bonds differs from the _____.
34. Using the amortization procedure, the holder of the debt securities (the investor) records interest revenue
each period at an amount equal to the _____ at the start of the period multiplied by the _____ applicable to that
debt on the day the firm acquired the debt. The bonds are classified as held to maturity.
35. Using the amortization procedure for bonds, if an investor receives cash each period, it debits Cash and
credits the Marketable Securities account. The result of this process is a new _____ (called the _____ for use in
the computations during the next period. The bonds are classified as held to maturity.
36. Using the amortization procedure, a holder of the debt securities (the investor) records interest revenue each
period by debiting the _____ and crediting _____ which after closing entries increases _____ The bonds are
classified as held to maturity.
37. The U.S. government will pay Humphrey $2,500,000 each six months, equal to 2.5% of the $100 million
face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay
the $100 million at the end of five years. At the time Humphrey purchases the bonds, the market prices these
bonds to yield Humphrey 6% annually (3% each six months). The bonds are classified as held to maturity.
Because the market requires a _____ than the _____ on the bonds, the bonds will sell on the market for a
_____.
38. The U.S. government will pay TC Anderson $2,500,000 each six months, equal to 2.5% of the $100
million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will
repay the $100 million at the end of five years. Assume that at the time TC Anderson purchases the bonds, the
market prices these bonds to yield TC Anderson 6% annually (3% each six months). The bonds are classified as
held to maturity. TC Anderson will pay an amount equal to _____ for the bonds.
39. The U.S. government will pay Bertram $2,500,000 each six months, equal to 2.5% of the $100 million face
amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay the
$100 million at the end of five years. At the time Bertram purchases the bonds, the market prices these bonds to
yield Bertram 6% annually (3% each six months). The bonds are classified as held to maturity. Bertram will
record the following entry.
40. The U.S. government will pay Alderton $2,500,000 each six months, equal to 2.5% of the $100 million
face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will repay
the $100 million at the end of five years. At the time Alderton purchases the bonds, the market prices these
bonds to yield Alderton 6% annually (3% each six months). The bonds are classified as held to
maturity. Alderton will pay an amount equal to _____ for the bonds.
41. The U.S. government will pay Abbott Company $2,500,000 each six months, equal to 2.5% of the $100
million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will
repay the $100 million at the end of five years. At the time Abbott Company purchases the bonds, the market
prices these bonds to yield Abbott Company 6% annually (3% each six months). The bonds are classified as
held to maturity. Because the market requires a _____ than the _____ on the bonds, the bonds will sell on the
market for a _____
42. The U.S. government will pay Avery Company $2,500,000 each six months, equal to 2.5% of the $100
million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will
repay the $100 million at the end of five years. At the time Avery Company purchases the bonds, the market
prices these bonds to yield Avery Company 6% annually (3% each six months). The bonds are classified as held
to maturity and Avery Company would classify this investment as a(n) _____on its _____ because it intends to
hold the securities for _____.
43. The U.S. government will pay Avery Company $2,500,000 each six months, equal to 2.5% of the $100
million face amount of the treasury bonds (5% annual coupon rate, paid in two installments each year), and will
repay the $100 million at the end of five years. At the time Avery Company purchases the bonds, the market
prices these bonds to yield Avery Company 6% annually (3% each six months). The bonds are classified as held
to maturity and Avery Company would classify this investment as a(n) _____on its _____ because it intends to
hold the securities for _____
44. U.S. GAAP and IFRS require firms to account for debt securities designated as held to maturity at _____
except that they are also subject to _____. That is, firms do not recognize increases in fair value (unrealized
gains) but might recognize decreases in fair value(unrealized losses).
45. U.S. GAAP and IFRS require firms to account for debt securities designated as held to maturity by not
recognizing _____ but might recognize _____.
46. U.S. GAAP and IFRS require firms to account for debt securities held-to-maturity that are deemed to be
impaired. The investor recognizes (debits) _____ and reduces (credits) _____
47. The argument for measuring held-to-maturity debt securities at amortized cost and ignoring most changes in
fair value during the contractual term of the debt is/are
48. The counter-argument for (1) not measuring held-to-maturity debt securities at amortized cost and (2)
recognizing most changes in fair value during the contractual term of the debt include any change in the _____
could change the investor’s willingness or ability to hold the securities until maturity.
49. The term _____ implies active and frequent buying and selling with the objective of generating profits from
short-term changes in market prices.
50. Firms include trading securities in _____ in the _____ section of the _____
51. For financial reporting purposes, acquisition and disposition of trading securities are usually _____
activities.
52. U.S. GAAP and IFRS require firms to report trading securities at _____
53. Which of the following is/are true regarding reporting trading securities at fair value on the balance sheet.
54. GAAP and IFRS require firms to report trading securities at fair value on the balance sheet. The income
statement reports the debit (loss) for decreases in the fair value and the credit (gain) for increases in the fair
value of trading securities in an account with a title such as _____.
55. Braithwaite Insurance
Braithwaite Insurance acquired shares of Moon Macrosystems’ common stock on December 28, 2009, for
$400,000 and classified them as trading securities. The fair value of these securities on December 31, 2009, was
$402,000. Braithwaite Insurance sold these shares on January 3, 2010, for $405,000.
(Refer to the Braithwaite Insurance) The journal entries to record acquisition of trading securities on December
28, 2009.
56. Braithwaite Insurance
Braithwaite Insurance acquired shares of Moon Macrosystems’ common stock on December 28, 2009, for
$400,000 and classified them as trading securities. The fair value of these securities on December 31, 2009, was
$402,000. Braithwaite Insurance sold these shares on January 3, 2010, for $405,000.
(Refer to the Braithwaite Insurance) The journal entries to measure trading securities at fair value and
recognize unrealized holding gain in net income on December 31, 2009.
57. Braithwaite Insurance
Braithwaite Insurance acquired shares of Moon Macrosystems’ common stock on December 28, 2009, for
$400,000 and classified them as trading securities. The fair value of these securities on December 31, 2009, was
$402,000. Braithwaite Insurance sold these shares on January 3, 2010, for $405,000.
(Refer to the Braithwaite Insurance) The journal entries to record the sale of trading securities at a gain on
January 3, 2010.
58. Braithwaite Insurance
Braithwaite Insurance acquired shares of Moon Macrosystems’ common stock on December 28, 2009, for
$400,000 and classified them as trading securities. The fair value of these securities on December 31, 2009, was
$402,000. Braithwaite Insurance sold these shares on January 3, 2010, for $405,000.
The total income from the purchase and sale of these securities is
59. Measurement of trading securities at _____ reflects income when it occurs in the form of a change in _____,
not when the investor realizes a gain or loss _____.
60. U.S. GAAP and IFRS require firms to classify marketable securities that are neither debt securities held to
maturity nor trading securities as _____.
61. Which of the following is/are not true?
62. Which of the following is not true regarding investments in securities available-for-sale?
63. Which of the following is not true regarding investments in securities available-for-sale?
64. Sarah Company
Sarah Company acquires common stock of Miriam Enterprises for $400,000 on November 1, 2009, and
designates this investment as available-for-sale. The fair value of these shares is $435,000 on December 31,
2009. Sarah sells these shares on August 15, 2010, for $480,000.
The journal entries to record acquisition of securities available-for-sale on November 1, 2009 is
65. Sarah Company
Sarah Company acquires common stock of Miriam Enterprises for $400,000 on November 1, 2009, and
designates this investment as available-for-sale. The fair value of these shares is $435,000 on December 31,
2009. Sarah sells these shares on August 15, 2010, for $480,000.
The journal entries to measure securities available-for-sale on December 31, 2009.
66. Sarah Company
Sarah Company acquires common stock of Miriam Enterprises for $400,000 on November 1, 2009, and
2009. Sarah sells these shares on August 15, 2010, for $480,000.
The journal entries to record the sale of securities available-for-sale on August 15, 2009.
67. Sarah Company
Sarah Company acquires common stock of Miriam Enterprises for $400,000 on November 1, 2009, and
designates this investment as available-for-sale. The fair value of these shares is $435,000 on December 31,
2009. Sarah sells these shares on August 15, 2010, for $480,000.
The total income from the purchase and sale of these securities is _____ reported _____
68. Which of the following is/are true regarding securities classified as available-for-sale?
69. Dexter Company decides that an available-for-sale security is impaired as of December 31, 2009 and has an
unrealized loss of $5,000. The journal entry to record an impairment loss on securities available-for-sale would
be:
70. Which of the following is true?
71. Which of the following is true?
72. The firm’s purpose for holding certain securities may change, requiring it to transfer securities from one
category to another. The firm transfers the securities at _____ at the time of the transfer.
73. U.S. GAAP requires which of the following disclosures about marketable securities each period?
74. Firms can purchase financial instruments to reduce certain business risks, that is, to reduce the volatility of
certain outcomes. The outcomes include changes in
75. Firms engage in transactions that subject them to specific financial risks. Most firms face risks—that is,
variability of outcome—from changes in interest rates, foreign exchange rates, and commodity prices. Firms
can purchase financial instruments to reduce these business risks, that is, to reduce the volatility of certain
outcomes. Some of these instruments trade in relatively active markets, like marketable securities, while others
have specialized terms and do not trade at all. The general term used for the types of financial instruments that
firms might buy to mitigate the risks is a(n)
76. Which of the following is/are true?
77. Which of the following is/are not true?