03 Cost Method and Transfers

Question 1

What is the effect on an Investment in Subsidiary account when the parent accounts for its investment using the cost method?

Answer 1

Under normal circumstances, the carrying amount of the investment does not change under the cost method.

Question 2

What major transactions or events would cause the carrying amount of an investment to change when the cost method is used to account for the investment?

Answer 2

The carrying amount of the investment would change when:

1 The subsidiary pays a liquidating dividend (i.e., dividend greater than earnings since the investment was made);

2 The investor buys additional shares of the subsidiary or sells some of the share it already owns.

Question 3

What causes transfers between classifications for investments which do not give the investor significant influence?

Answer 3

Changes in investor intent or Changes in investor ability to hold-to-maturity.

Question 4

How do we account for the transfer of an investment from held-to-maturity to held-for-trading?

Answer 4

1 Credit held-to-maturity at unamortized cost;

2 Debit Trading at fair value;

3 Recognize unrealized holding gain/ loss in net income.

Question 5

How do we account for the transfer of an investment from held-to-maturity to available-for-sale?

Answer 5

1 Credit held-to-maturity at unamortized cost;

2 Debit available-for-sale at fair value;

3 Unrealized (holding) gain or loss to Other Comprehensive Income.

Question 6

How do we account for the transfer of an investment from held-for-trading to held-to-maturity or available-for-sale?

Answer 6

1 Credit Trading at recorded fair value;

2 Debit held-to-maturity or available-for-sale at current fair value;

3 Recognize unrealized holding gain/ loss in net income.

Question 7

How do we account for the transfer of an investment from available-for-sale to held-to-maturity? 4 Steps:

Answer 7

1 Credit available-for-sale at recorded fair value;

2 Debit held-to-maturity at current fair value;

3 Unrealized holding gain/loss stays in Accumulate Other Comprehensive Income in Shareholders’ Equity

4 Unrealized holding gain/loss at date of transfer amortized over remaining life of debt.