Murray Company acquired $100,000 face value of the outstanding bonds of Campbell Company on January 1, 2013. The bonds pay interest semiannually on June 30 and December 31 at an annual rate of 6% and mature on December 31, 2016. The market priced these bonds on January 1, 2013, to yield 8% compounded semiannually. Murray Company classifies these bonds as held-to-maturity securities.

d. Give the journal entries that Murray Company would make to account for these bonds on December 31, 2016.

Describe the accounting treatment using one of the following four approaches, assuming that the firm does not elect the fair value option:

(1) Measured at fair value with changes recognized in net income. (2) Measured at amortized cost. (3) Measured at fair value with changes recognized initially in other comprehensive income. (4) Measurement depends on whether firm uses hedge accounting.

d. Marketable equity securities held for an indefinite period as available-for-sale securities.

Describe the accounting treatment using one of the following four approaches, assuming that the firm does not elect the fair value option:

(1) Measured at fair value with changes recognized in net income. (2) Measured at amortized cost. (3) Measured at fair value with changes recognized initially in other comprehensive income. (4) Measurement depends on whether firm uses hedge accounting.

c. Debt securities that the firm has purchased with the ability to hold to maturity. After the current year, the firm’s intent to hold the securities until maturity is uncertain. The firm frequently buys and sells debt of this sort.

Describe the accounting treatment using one of the following four approaches, assuming that the firm does not elect the fair value option:

(1) Measured at fair value with changes recognized in net income. (2) Measured at amortized cost. (3) Measured at fair value with changes recognized initially in other comprehensive income. (4) Measurement depends on whether firm uses hedge accounting.

b. Derivatives appearing as liabilities. These derivatives do not hedge assets or liabilities or forecasted transactions.

Describe the accounting treatment using one of the following four approaches, assuming that the firm does not elect the fair value option:

(1) Measured at fair value with changes recognized in net income. (2) Measured at amortized cost. (3) Measured at fair value with changes recognized initially in other comprehensive income. (4) Measurement depends on whether firm uses hedge accounting.

a. A derivative judged to be effective used to hedge forecasted sales.

Firms that do not elect the fair value option classify marketable securities along two dimensions:

• Purpose of investment: held-to-maturity debt securities, trading securities, or available-for-sale securities.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

f. A U.S. computer company has bonds outstanding that are payable in Swiss francs and mature in installments over the next five years. The computer company purchases a Swiss winery’s bonds, denominated in Swiss francs, that mature in seven years. The computer company will sell a portion of the bonds of the Swiss winery each year to obtain the Swiss francs needed to repay its franc-denominated bonds.

Firms that do not elect the fair value option classify marketable securities along two dimensions:

• Purpose of investment: held-to-maturity debt securities, trading securities, or available-for-sale securities.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

e. A bank maintains a department that regularly purchases and sells securities. This department acquires common stock of Nissan Motors because it thinks the market price does not fully reflect favorable news about Nissan.

Firms that do not elect the fair value option classify marketable securities along two dimensions:

• Purpose of investment: held-to-maturity debt securities, trading securities, or available-for-sale securities.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

d. A pharmaceutical company acquires common stock of a biogenetic startup company that conducts research in human growth hormones. The pharmaceutical company hopes the investment will lead to a joint venture in the future.

Firms that do not elect the fair value option classify marketable securities along two dimensions:

• Purpose of investment: held-to-maturity debt securities, trading securities, or available-for-sale securities.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

c. A bank acquires bonds of the state of New York to earn tax-exempt interest revenue. The bank plans to sell the bonds when it needs cash for ongoing operating needs.

Firms that do not elect the fair value option classify marketable securities along two dimensions:

• Purpose of investment: held-to-maturity debt securities, trading securities, or available-for-sale securities.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

b. An electric utility has bonds payable outstanding for $100 million that mature in five years. The electric utility acquires U.S. Treasury bonds with a maturity value of$100 million in five years. The firm plans to use the proceeds from the Treasury bonds to repay its own outstanding bonds.

Firms that do not elect the fair value option classify marketable securities along two dimensions:

• Purpose of investment: held-to-maturity debt securities, trading securities, or available-for-sale securities.
• Length of expected holding period: current asset (Marketable Securities) or noncurrent asset (Investment in Securities).

Classify each of the securities below along each of these two dimensions.

a. A forest products company plans to construct a pulp-processing plant beginning in April of next year. It issues common stock for $200 million on December 10 of this year to help finance construction. The company invests this$200 million in U.S. treasury bonds to generate income until it needs the cash for construction.

“Adopting the fair value option for marketable securities collapses the accounting methods discussed in this chapter to a single accounting method.” Do you agree? Why or why not?

Reviews the meaning of the terms and concepts listed above in Key Terms and Concept.

Indicate whether each of the following is a characteristic of an endothermic or an exothermic chemical reaction. a. There is more energy stored in product molecule bonds than in reactant molecule bonds. b. The energy required to break bonds in the reactants is less than the energy released by bond formation in the products.