question archive Walsh College ACC 503 1) Newberry purchased XYZ bonds for $80,000 on 1/1/20 and classified the bonds as available-for-sale
Walsh College ACC 503 1) Newberry purchased XYZ bonds for $80,000 on 1/1/20 and classified the bonds as available-for-sale
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1) Newberry purchased XYZ bonds for $80,000 on 1/1/20 and classified the bonds as available-for-sale. The year-end values of these bonds for years 2020-2022 respectively were $82,000, $79,000, and $75,000. Suppose Newberry erroneously accounted for these securities as if they were "Trading" since their purchase. Net Income for 2022 would be:
Select one:
a.$5,000 understated
b.$4,000 understated
c.$1,000 understated
d.$5,000 overstated
e.$7,000 overstated
2) Bonds purchased at a discount that are classified HTM should be on the balance sheet at
Select one:
a.Cost
b.Amortized cost
c.Fair value
d.Lower of cost or market
e. Higher of cost or market
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Answer:
1. A. $5,000 Understated
2. B. Amortized Cost
Step-by-step explanation
1. Cost beg. 80,000
FV of Bonds at 2022 75,000
Decrease in Value (5,000)
Newberry must report the decrease in value of 5,000 in other comprehensive income, however since he erroneously classified the bonds as held for trading he therefore erroneously charge the 5,000 decrease in value to net income.
To correct newberry net income must add back the 5,000. Therefore net income is understated by 5,000.
2. Held to maturity are reported at amortized cost.
