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Chapter+17+Solutions - CHAPTER 17 Investments ANSWERS TO...

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CHAPTER 17 - Investments ANSWERS TO QUESTIONS 1. A debt security is an instrument representing a creditor relationship with an enterprise. Debt securities include U.S. government securities, municipal securities, corporate bonds, convertible debt, and commercial paper. Trade accounts receivable and loans receivable are not debt securities because they do not meet the definition of a security. An equity security is described as a security representing an ownership interest such as common, preferred, or other capital stock. It also includes rights to acquire or dispose of an ownership interest at an agreed-upon or determinable price such as warrants, rights, and call options or put options. Convertible debt securities and redeemable preferred stocks are not treated as equity securities. 2. The variety in bond features along with the variability in interest rates permits investors to shop for exactly the investment that satisfies their risk, yield, and marketability desires, and permits issuers to create a debt instrument best suited to their needs. 3. Cost includes the total consideration to acquire the investment, including brokerage fees and other costs incidental to the purchase. 4. The three types of classifications are: Held-to-maturity: Debt securities that the enterprise has the positive intent and ability to hold to maturity. Trading: Debt securities bought and held primarily for sale in the near term to generate income on short-term price differences. Available-for-sale: Debt securities not classified as held-to-maturity or trading securities. 5. A debt security should be classified as held-to-maturity only if the company has both: (1) the positive intent and (2) the ability to hold those securities to maturity. 6. Trading securities are reported at fair value, with unrealized holding gains and losses reported as part of net income. Since trading securities are held primarily for sale in the near term, any discount or premium is not amortized. 7. Trading and available-for-sale securities should be reported at fair value, whereas held-to- maturity securities should be reported at amortized cost. 8. $1,750,000 X 10% = $175,000; $175,000 ÷ 2 = $87,500. 9. Securities Fair Value Adjustment (Available-for-Sale) ................................. 44,500 Unrealized Holding Gain or Loss—Equity ............................................ 44,500 [$1,802,000 – ($1,750,000 + $7,500)] 10. Unrealized holding gains and losses for trading securities should be included in net income for the current period. Unrealized holding gains and losses for available-for-sale securities should be reported as other comprehensive income and as a separate component of stockholders’ equity. Unrealized holding gains and losses are not recognized for held-to-maturity securities. 11. (a) Unrealized Holding Gain or Loss—Equity ............................................ 70,000 Securities Fair Value Adjustment (Available-for-Sale) .................. 70,000 (b) Unrealized Holding Gain or Loss—Equity ............................................ 80,000 Securities Fair Value Adjustment (Available-for-Sale) .................. 80,000 17-1
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Questions Chapter 17 (Continued) 12. Investments in equity securities can be classified as follows: 1. Holdings of less than 20% (fair value method)—investor has passive interest.
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