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Chapter 11: Q17-4Q (page 552)

Question: Identify and explain the three types of classifications for investments in debt securities.

Short Answer

Expert verified

Answer:

Three types of debt security are hold-to-maturity, trading securities, and available-for-sale.

Step by step solution

01

Definition of a debt security

Debt securities are securities issued by the company that fulfill its cash need. In debt securities, the issuer promises to pay the amount on the date of maturity along with interest.

02

Types of Investment in debt securities

Three types of investment in debt securities:

  1. Hold-to-Maturity: In this type of investment, the purpose is to hold the securities till the date of maturity. Generally, this type of investment is done for the long-term period.

2. Trading: It is the type of investment in which the investment is made to trade these securities. In this, the investor holds the security for the short-term and sells it when the price of security increases.

3. Available-for-Sale: The securities not included in the two other types of investment are included here. In this, the investor sells the securities after some years but before the maturity of the securities.

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Most popular questions from this chapter

(Impairment) Presented below is information related to equipment owned by Suarez Company at December 31, 2017.

Cost

\(9,000,000

Accumulated depreciation to date

1,000,000

Expected future net cash flows

7,000,000

Fair value

4,800,000

Assume that Suarez will continue to use this asset in the future. As of December 31, 2017, the equipment has a remaining useful life of 4 years.

Instructions

  1. Prepare the journal entry (if any) to record the impairment of the asset at December 31, 2017.
  2. Prepare the journal entry to record depreciation expense for 2018.
  3. The fair value of the equipment at December 31, 2018, is \)5,100,000. Prepare the journal entry (if any) necessary to record this increase in fair value.

Francis Corporation purchased an asset at a cost of \(50,000 on March 1, 2017. The asset has a useful life of 8 years and a salvage value of \)4,000. For tax purposes, the MACRS class life is 5 years. Compute tax depreciation for each year 2017–2022.

(Ratio Analysis) The 2014 annual report of Tootsie Roll Industries contains the following information.

(in millions)

December 31, 2014

December 31, 2013

Total assets

\(910.4

\)888.4

Total liabilities

219.3

208.1

Net sales

539.9

539.6

Net income

63.2

60.8

Instructions

Compute the following ratios for Tootsie Roll for 2014.

  1. Asset turnover.
  2. Return on assets.
  3. Profit margin on sales.
  4. How can the asset turnover be used to compute the return on assets?

Distinguish among depreciation, depletion, and amortization.

(Depletion Computations—Mining) Alcide Mining Company purchased land on February 1, 2017, at a cost of \(1,190,000. It is estimated that a total of 60,000 tons of mineral was available for mining. After it has removed all the natural resources, the company will be required to restore the property to its previous state because of strict environmental protection laws. It estimates the fair value of this restoration obligation at \)90,000. It believes it will be able to sell the property afterwards for \(100,000. It incurred developmental costs of \)200,000 before it was able to do any mining. In 2017, resources removed totaled 30,000 tons. The company sold 22,000 tons.

Instructions

Compute the following information for 2017.

  1. Per unit material cost.
  2. Total material cost of December 31, 2017, inventory.
  3. Total material cost in cost of goods sold at December 31, 2017.
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