ACTP 5007_class 4 (2009 - 13e) - Exercise 17-1(Investment Classification For the following investments identify whether they are 1 Trading Securities 2

ACTP 5007_class 4 (2009 - 13e) - Exercise 17-1(Investment...

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Exercise 17-1 (Investment Classification) For the following investments, identify whether they are: 1 Trading Securities 2 Available-for-Sale Securities 3 Held-to-Maturity Securities Each case is independent of the other. (a) A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected to be next month, it will be sold. 1 Trading security - because the company purchased this bond with the intention of selling it in the near future, they must classify it as a Trading Security. (b) 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock. 2 Available-for-Sale (AFS) Security - When a company does not plan to sell the security in the near future but does not or can not hold the security until its maturity, it must classify it as an Available-for-Sale (AFS) security. Note that the company intends to acquire 30% of Farm-Co stock but has not done so yet. When they do acquire 20% or more of that stock, they must use the equity method of accounting for their holdings in that stock. © 10-year bonds were purchased this year. The bonds mature at the first of next year. 1 Trading security - because the bonds were not purchased at the beginning of their life and they mature in less than a year, they are short-term securities and must be classified as Trading Securities. (d) Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold. 2 Available-for-Sale - when a company does not know how long it will hold a security, or when it will hold it for more than a year but less than its maturity date, it must classify it as an AFS security. (e) A bond that matures in 10 years was purchased. The company is investing money set aside for an expansion project planned 10 years from now. 3 The company is investing in a 10-year bond in order to use those funds to start a project 10 years from now. Therefore, they intend to hold this bond until its maturity, so they must classify this security as a Held-to-Maturity security. (f) Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time. 2 Available-for-Sale - Even though the company plans to hold the security for a long time, this is an equity security so it does not have a maturity date. Therefore, it must be classified as Available-for-Sale.
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Exercise 17-3 (Entries for Held-to-Maturity Securities) On January 1, 2009, Roosevelt Company purchased 12% bonds, having a maturity value of $500,000, for $437,907.40. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2009, and mature January 1, 2014, with interest receivable December 31 of each year.
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  • Fall '09
  • unrealized holding gain, Available-for-Sale Securities, Trading Securities

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