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Introduction to Investments in Securities quiz #2

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  • What happens to the value of trading and available for sale securities if their market price changes?
    Their value is adjusted to fair value, and unrealized gains or losses are recognized accordingly.
  • How does the classification of a security affect its reporting on the financial statements?
    It determines where gains or losses are reported and whether the asset is current or long-term.
  • What is the journal entry to record the purchase of a security?
    Debit the investment account and credit cash for the purchase price.
  • What is the journal entry to record dividend income from an equity security?
    Debit cash and credit dividend income for the amount received.
  • What is the journal entry to record interest income from a debt security?
    Debit cash and credit interest income for the amount received.
  • What is the journal entry to record an unrealized gain on a trading security?
    Debit the investment account and credit unrealized gain (income statement).
  • What is the journal entry to record an unrealized gain on an available for sale security?
    Debit the investment account and credit unrealized gain (other comprehensive income).
  • What is the journal entry to record the sale of a security?
    Debit cash for the sale proceeds, credit the investment account for the carrying value, and recognize any gain or loss.
  • What is the effect of selling a security on the financial statements?
    The sale results in a realized gain or loss, which is reported on the income statement.
  • What is the difference between realized and unrealized gains?
    Realized gains occur when a security is sold; unrealized gains are changes in value before sale.
  • How are realized gains on securities reported?
    Realized gains are reported on the income statement.
  • How are unrealized gains on trading securities reported?
    Unrealized gains on trading securities are reported on the income statement.
  • How are unrealized gains on available for sale securities reported?
    Unrealized gains on available for sale securities are reported in other comprehensive income.
  • What is the term used to describe buying stock on credit in financial accounting?
    Buying stock on credit is called buying on margin.