At acquisition, debt securities are:Multiple ChoiceRecorded at cost.Recorded at the amount of interest that will be received over the life of the security.Recorded at cost plus the amount of dividend income to be received.Not recorded, because no interest is due yet.Recorded at their cost, plus total interest that will be received over the life of the security.
Question
At acquisition, debt securities are:Multiple ChoiceRecorded at cost.Recorded at the amount of interest that will be received over the life of the security.Recorded at cost plus the amount of dividend income to be received.Not recorded, because no interest is due yet.Recorded at their cost, plus total interest that will be received over the life of the security.
Solution
The correct answer is: Recorded at cost.
Here's why:
When a company acquires debt securities such as bonds, it records them at the purchase price, also known as the cost. This is because the cost principle requires that assets be recorded at the cash amount (or the equivalent) at the time that an asset is acquired.
The other options are incorrect because:
- The amount of interest that will be received over the life of the security is not considered in the initial recording of the debt security. Interest is recorded as it is earned, not upfront.
- Dividend income is not relevant to debt securities. Dividends are distributions from earnings made by a corporation to its shareholders – they are not a feature of debt securities.
- The statement that no recording is made because no interest is due yet is incorrect. The acquisition of a debt security is recorded when it is purchased, not when interest is due.
- The cost of a debt security does not include the total interest that will be received over the life of the security. As mentioned earlier, interest is recorded as it is earned, not at the time of purchase.
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