Chapter 14
Investments in
Debt and Equity Securities
Learning Objectives – Coverage by question
Multiple Choice
LO 14-1 – Account for debt securities measured at amortized cost 1-4
LO 14-2 – Account for debt securities measured at FV-NI 5-8
LO 14-3 – Account for debt securities measured at FV-OCI 9-12
LO 14-4 – Account for equity securities measured at FV-NI 13-15
LO 14-5 – Account for equity securities following the equity method 16-18
LO 14-6 – Adjust debt and equity securities for impairment 19-21
LO 14-7 – Explain the accounting for transfers of investments 22-24
LO 14-8 – Describe accounting for special-purpose funds and
25-26
investments in life insurance policies
LO 14-9 – Describe and account for derivatives 27-30
2023
14-1 Intermediate Accounting, 3rd Edition
,Chapter 14: Investments in Debt and Equity Securities
Multiple Choice
Topic: Account for debt securities measured at amortized cost
LO: 1
1. Tennison Products purchased a 5-year, $50,000 bond at face value on July 1, 2017. The bond’s stated
interest rate is 5%, paid annually on June 30. Tennison has the intent and the ability to hold the bond
for the full five years. As a result of changes in the overall economy, the bond had a fair value of
$51,000 on July 1, 2018, and $52,000 on July 1, 2019.
What is the carrying value of the debt security on July 1, 2018, and 2019, respectively?
A) $50,000; $50,000
B) $51,000; $52,000
C) $50,000; $55,000
D) $52,500; $55,000
E) $50,000; $52,500
Answer: A
Rationale: HTM bonds purchased at face value are carried at cost, regardless of fair value.
Topic: Account for debt securities measured at amortized cost
LO: 1
2. Calliope Enterprises purchased a $100,000 bond on January 1, 2019. The bond matures on December
31, 2023, and pays interest annually (on December 31), at 6%. Calliope purchased the bond at a price
to yield an 8% return and properly recorded the bond as a held-to-maturity security. Calliope uses the
effective interest method to determine interest revenue.
What was the carrying value of the investment at December 31, 2019? How much interest revenue
was reported in 2021?
Investment Interest
Carrying Value Revenue
A) $93,376 $7,588
B) $100,000 $8,160
C) $92,015 $7,470
D) $94,846 $7,715
E) $108,425 $9,119
Answer: A
Rationale:
Cash Interest Carrying
Interest Revenue Amortization Value
Jan. 1, 2019 $92,015
Dec. 31, 2019 $6,000 $7,361 $1,361 93,376
Dec. 31, 2020 6,000 7,470 1,470 94,846
Dec. 31, 2021 6,000 7,588 1,588 96,434
2023
Test Bank, Chapter 14 14-2
,Topic: Account for debt securities measured at amortized cost
LO: 1
3. Calliope Enterprises purchased $100,000 bond on January 1, 2019. The bond matures on December
31, 2023, and pays interest annually (on December 31), at 6%. Calliope purchased the bond at a price
to yield a 5% return and properly recorded the bond as a held-to-maturity security. Calliope uses the
straight-line method to determine interest revenue.
What was the carrying value of the investment at December 31, 2019? How much total interest revenue
did Calliope report over the 5-year bond term?
Investment Interest
Carrying Value Revenue
A) $103,463 $25,671
B) $100,000 $30,000
C) $104,329 $30,000
D) $102,837 $26,454
E) $103,546 $80,000
Answer: A
Rationale:
Cash Interest Carrying
Interest Revenue Amortization Value
Jan. 1, 2019 $104,329
Dec. 31, 2019 $6,000 $5,134 $(866) $103,463
Total interest revenue is equal to $30,000 ($6,000 x 5) - $4,329 ($104,329 - $100,000) = $25,671.
Topic: Account for debt securities measured at amortized cost
LO: 1
4. Which of the following statements about held-to-maturity (HTM) debt securities is(are) accurate?
A) Amortized cost method can be used in accounting for all debt securities that the entity has the intent
and ability to hold to maturity.
B) All remaining HTM securities must be reclassified to either trading or available-for-sale securities if
an entity sells any of its HTM securities before maturity.
C) Fair values and unrecognized holding gains or losses on HTM securities must be disclosed in the
financial statements.
D) A and B
E) A and C
Answer: E
Rationale:
A is accurate because an entity must have the intent and ability to hold the debt security to maturity
before the amortized cost method can be used (320-10-25-3).
B is not accurate because a “pattern of sales or transfers” must exist before reclassification of other
debt securities is required (320-10-25-3).
C is accurate. “The aggregate fair value of an HTM investment and any unrecognized holding gain
(loss) are disclosed……”. (p. 14-5)
2023
14-3 Intermediate Accounting, 3rd Edition
, Topic: Account for debt securities measured at FV-NI
LO: 2
5. Wyatt, Inc. purchased a $75,000 bond, at par, from Arrow, Inc. on November 30, 2019. The bond’s
stated interest rate is 6% with interest paid semiannually (June 30 and December 31). The bond’s
maturity date is December 31, 2023.
Wyatt anticipated a decrease in interest rates over the next year and intended to sell the bond at that
time. As of December 31, 2019, however, the fair value of the bond was $74,500. Wyatt classifies the
bond as a trading security.
How much did Wyatt pay for the bond on November 30, 2019? How much interest did Arrow pay Wyatt
in 2019? What was the carrying value of the bond at December 31, 2019?
Bond Purchase Interest Bond Carrying
Price Paid Value
A) $75,375 $375 $73,125
B) $75,000 $1,875 $75,000
C) $77,250 $2,250 $75,000
D) $76,875 $4,500 $74,500
E) $76,875 $2,250 $74,500
Answer: E
Rationale: The amount paid for the bond includes the face value of $75,000 plus accrued interest of
$1,875 ($75,000 x 3% ÷ 6 x 5) for a total of $76,875. The amount of interest paid to Arrow equals the
6-month interest payment of $2,250 ($75,000 x 3%). The carrying value of the bond at year-end is the
fair value of $74,500.
Use the following information to answer Questions 6 and 7.
On July 1, 2019, Daphne’s Delights Inc. purchased a 3-year, $75,000 face value bond with a June 30, 2022,
maturity date. The bond’s stated rate of interest was 5%, paid semiannually (June 30 and December 31).
The bond was properly reported as a trading security.
Topic: Account for debt securities measured at FV-NI
LO: 2
6. The fair value of the bond purchased by Daphne’s was $73,500 on December 31, 2019.
What was the balance in the Fair Value Adjustment account at December 31, 2019? What was the net
dollar impact of any and all bond related entries on 2019 income before income taxes?
FVA Effect on
Account Bal. Net Income
A) $1,500 Cr. $ 375 increase
B) $1,500 Cr. $3,375 increase
C) $1,500 Dr. $2,250 increase
D) $1,500 Dr. $ 375 increase
E) $1,500 Cr. $2,250 increase
Answer: A
Rationale: The fair value adjustment account has a $1,500 credit balance on December 31, 2019,
($73,500 - $75,000). The net effect on net income is an increase of $375: Interest revenue of $1,875
($75,000 x .05 ÷ 2) less an unrealized loss of $1,500 to equal a net increase of $375.
2023
Test Bank, Chapter 14 14-4
