Question

In: Accounting

For the following investments, identify whether they are:       A. Trading                          

For the following investments, identify whether they are:

      A. Trading                                                           

      B. Available-for-Sale                                          

      C. Held-to-Maturity

      D. None of the above

A letter may be used more than once or not at all. (5 points)

____    1. Preferred stock was purchased in the previous year. The company intends to hold it

                 for several more years.

____    2. 5-year bonds were purchased this year. The company plans to sell the bonds

                 immediately after the next interest payment which will occur one month after the

                 purchase.

____    3. 5% of the common stock of Atkinson, Inc. is owned as an investment. The holding

                 company intends sell the stock as soon as the price increases which is expected to

                 occur in two weeks.

____    4.    A bond that matures in ten years was purchased. The company intends to hold the bond for the full ten years in order to receive the interest revenue. Cash needs, however, may result in the bond being sold in the next year.

____   5.    A bond that matures in two years was purchased as a means of funding the purchase

                  of new capital equipment that is projected to be needed two years from now.

Solutions

Expert Solution

Held to maturity securities are debt securities only which the enterprise has the intent and ability to hold to maturity.

Trading securities are debt and equity securities held principally for selling them in the near term. The intent here is to profit over the near term.

Available for sale securities include all other debt and equity securities, and are reported at fair value.

1. B- Available for sale: As it is not debt so can not be classified as Held to maturity. Further, it is not with intend to make profit over near term so not Trading securities. Therefore classified as Available for sale securities.

2. A- Trading : As the bonds are intended to sell in near future with an intent to earn interest return.

3. A - Trading : The intent here is to sell the securities as soon as the price increases. Which will occur in near future.

4. B- Available for sale securities : Here bonds are intended to be held till maturity, but with intentions ability to hold should also be considered. As mentioned any cash need may result in selling of the securities, therefore assuming ability to hold the same till maturity is not assured. Also, it is not for trading purpose, so classified as Available for sale.

5. C- Held till maturity : Here the intention of comany is to hold investment till maturity. It is a debt security. Further company is able to hold the same till maturity as no condition is there which will cause for early sell. Therefore same is classified as Held till maturity.


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