Intermediate II Accounting (graded A+ and with accurate answers)

Companies' motivations for investing in debt or equity securities issued by other companies: - ANS1) To earn a high rate of return 2) To secure certain operating or financing arrangements with another company How to provide useful information - ANSCompanies account for investment based on the type of security (debt or equity) and their intent with respect to the investment. Debt securities - ANSFinancial securities that represent a creditor relationship with another entity. Examples are U.S. government securities, municipal securities, corporate bonds, convertible debt, and commercial paper. 3 categories of companies group investments in debt securities - ANS1) Held to maturity 2) Trading 3) Available-for-sale Held to maturity - ANSDebt securities that the company has the positive intent and ability to hold to maturity. Companies report held-to-maturity securities at amortized cost, recognize interest when earned, and do not recognize unrealized holding gains or losses. Only debt securities could be classified as this. Trading - ANSDebt securities bought and held primarily for sale in the near term to generate income on short-term price differences. Companies report trading securities at fair value at each reporting date, with unrealized holding gains and losses recognized as net income. Interest is recorded when earned. Available-for-sale - ANSDebt securities not classified as held-to-maturity or trading securities. Companies report available-for-sale securities at fair value, but do not report changes in fair value as part of net income until after they sell the security. Interest on available-for-sale securities is recorded when earned. Unrealized holding gains and losses on available-for-sale debt securities are recognized as other comprehensive income and as a separate component of stockholders' equity. Amortized cost - ANSThe acquisition cost of debt securities adjusted for the amortization of discount or premium, if appropriate. Amortized cost is the valuation amount companies use to account for held-to-maturity debt securities. Fair value - ANSThe price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.