ANSWER OF THE QUESTIONS

1 A debt security is an instrument representing a creditor relationship with an entity. Debt securities
include U.S. government securities, municipal securities, corporate bonds, convertible debt, and
commercial paper. Trade accounts receivable and loans receivable are not debt securities
because they do not meet the definition of a security.

An equity security is described as a security representing an ownership interest such as common,

preferred, or other capital stock. It also includes rights to acquire or dispose of an ownership
interest at an agreed-upon or determinable price, such as warrants, rights, and call options or put
options. Convertible debt securities and redeemable preferred stocks are not treated as equity
securities

3 Cost of a long-term investment in bonds includes the total consideration to acquire the
investment, including brokerage fees and other costs incidental to the purchase

4 The three types of classifications for debt investments are:

Held-to-maturity: Debt investments that the company has the positive
intent and ability to hold to maturity.
Trading:Debt investments bought and held primarily for sale in the near
term to generate income on short-term price differences.
Available-for-sale: Debt investments not classified as held-to-maturity or trading securities.

8 €3,500,000 X 10% = €350,000; €350,000 ÷ 2 = €175,000. Wheeler would make the following entry:
Cash (€4,000,000 X 8% X 1/2) 160.000
Debt Investments 15.000
Interest Revenue (€3,500,000 X 10% X 1/2) 175.000

9 Fair Value Adjustment 89.000

Unrealized Holding Gain or Loss—Income 89.000
[€3,604,000 – (€3,500,000 + €15,000)*]
 entity. Debt securities
convertible debt, and Nama Cristina Karimba
ebt securities Nim 202030141
Matkul AKM2 - 17

rest such as common,

of an ownership
nd call options or put
t treated as equity

acquire the

aturity or trading securities.

make the following entry:

EXERCISE 17

E17-1 (a) 2. (b) 4. (c) 2. (d) 1. (e) 1. (f) 4

E17-2 (a) January 1, 2020

Debt Investments 300.000
Cash

(b) December 31, 2020

Cash 30.000
Interest Revenue

(c) January 1, 2020

Cash 30.000
Interest Received

E17-5 (a) Schedule pf interest Revenue and Bond Discount Amortizatio

Straight-line method
9% Bond Purchased to Yield 12%

Date Cash Received Interest Revenue Bond Discount Amortization

1/1/2017 - - -
1/1/2018 $ 18.000 $ 22.80 4,804*
1/1/2019 $ 18.000 $ 22.80 $ 4.80
1/1/2020 $ 18.000 22,803** $ 4.80

*($200,000 - $185,589) / 3 = $4,804

**Rounded by $1.

(b) Schedule pf interest Revenue and Bond Discount Amortizatio

Effective-Interest method
9% Bond Purchased to Yield 12%

Date Cash Received Interest Revenue Bond Discount Amortization

1/1/2017 - - -
1/1/2018 $ 18.000 $22,270.68* $4,270.68
1/1/2019 $ 18.000 22,783.16 4,783.16
1/1/2020 $ 18.000 23,357.16** 5,537.16

*$185,589 X .12 = $22,270.68

**Rounded by $02.

(c) December 31, 2020

 Interest Receivable 18,000.00
Debt Investments 4,804.00
Interest Revenue

(d) December 31, 2020

Interest Receivable 18,000.00
Debt Investments 4,783.16
Interest Revenue
 300.000

30.000

30.000

ond Discount Amortization

ethod
o Yield 12%

Carrying Amount of Bonds

$ 185.59
$ 190.39
$ 195.20
$ 200.000

ond Discount Amortization

method
o Yield 12%

Carrying Amount of Bonds

$185,589.00
189,859.68
194,642.84
200,000.00
22,804.00

22,783.16