2E Investments Flashcards
Held to Maturity debt securities
- Carrying value amortized for any discounts or premiums.
- No unrealized gains/losses
- returns recorded to interest income
Trading debit securities (short term)
- Measured at fair value
- Changes in fair value recorded as unrealized gain/loss
- Returns recorded to interest income
Available for sale debt securities (long term but not to maturity)
- Measured at fair value
- Changes in fair value recorded to OCI/AOCI
- Returns recorded to interest income
Readily determinable fair value of equity securities 0.01% to < 20%
- Measured at fair value
- Changes in fair value recorded as unrealized gain/loss
- Returns recorded to dividend income
No readily determinable fair value of equity securities 0.01% to < 20%
- Measured at historical cost less impairment
- No unrealized gain/loss
- Returns recorded to dividend income
Equity method investment 20% to 50%
- Investment account adjusted for gain/loss and dividends
- Changes in fair value recorded as adjustments to investment account (BS) and equity in earnings (IS)
- Returns adjust investment account for dividends paid
20% to 50% - Fair value option, if elected
- Measured at fair value
- Changes in fair value recorded Other Income/Loss
- Returns recorded to dividend income
50%+ - Consolidation(Acquisition) method
- Eliminate investment account
- Non-controlling interest account for less than 100% ownership
- Subsidiary balance sheet accounts at fair value
- Changes in value recorded to Goodwill (debit) or Gain on bargain purchase (credit)
Levels of the fair value hierarchy
Level 1 - Observable, quoted prices in active markets for identical assets
Level 2 - Observable prices for similar assets in active markets OR identical assets in inactive markets
Level 3 - Unobservable inputs using the best information reasonably available
Changes in fair value for trading security
Increase in Fair Value:
Dr - Valuation allowance
Cr - Unrealized gain
Decrease in Fair Value:
Dr - Unrealized loss
Cr - Valuation allowance
Change in fair value for Available for Sale security
Increase in Fair Value:
Dr -Investment in AFS securities
Cr - Unrealized gain-OCI
Decrease in Fair Value:
Dr - Unrealized loss-OCI
Cr - Investment in AFS securities
Impairment of Available for Sale securities
Cost > fair value, permanently. Recognize immediately.
Dr - Impairment loss on AFS securities
Cr - Investment in AFS securities
Sale of Available for Sale securities
- Adjust to fair value
- Record the sale
Dr - Cash
Dr - Loss on disposal
Cr - Investment in AFS
Cr - Gain on disposal
Held to Maturity debt investments
must have positive intent and ability to hold the security until maturity
Held to maturity initial measurement
Present value of $1 = face value x market rate (divided by 2, if semi-annually)
+ Present value of annuity = face value x contract rate (divided by 2, if semi-annually)
= Cash amount paid
Purchaser:
Dr - Investment in bonds Face value
Cr - Cash Present value of $1 + Present value of annuity
Cr - Unamort. bond discount Plug
Issuer:
Dr - Cash Present value of $1 + Present value of annuity
Cr - Bonds Payable Face value
Dr - Unamort. bond discount Plug
Held to maturity Interest Payment
Purchaser:
Dr - Cash Face value x stated rate (divided by 2, if semi-annually)
Dr - Bond discount Plug
Cr - Interest income Cash paid amount x market rate (divided by 2, if semi-annually)
Issuer:
Dr - Interest expense Cash paid amount x market rate (divided by 2, if semi-annually)
Cr - Bond discount Plug
Cr - Cash Face value x stated rate (divided by 2, if semi-annually)
Accrual at end of year will hit interest receivable/payable instead of cash
Conditions for selling HTM security prior to maturity date
- Sale is close to maturity date (within 3 months)
- Sale after substantial portion of principal is collected (85%+)
Realized gain/loss is recognized if carrying value differs from selling price
HTM sale JE
Dr - Cash Plug
Cr - Interest income (Face value x contract rate)x(length of time since last payment ie 5/6)
Cr - Bond Carrying value (including last weighted interest payment)
Cr - gain on sale of bond Selling price less carrying value
Impairment of HTM bonds
Carrying value > fair value, permanently
Dr - Impairment loss on bond
Cr - Investment in bonds
When the equity method is applicable
20-50% or significant influence. Adopted prospectively.
Under IFRS, Fair Value option not permitted for entities with significant influence
True
Effect of net income (loss) under equity method
Net income:
Dr - Investment in Company
Cr - Equity in earnings
Net Loss:
Dr - Equity in earnings
Cr - Investment in Company
Based on % of ownership. Prorate income based on ownership date.
Dividend income under the equity method
Dr - Cash or dividends receivable
Cr - Investment in Company
Do NOT prorate dividends. Multiply by ownership %.
Changing to/from the equity method
Change is prospective. Make changes going forward, not backward.
Impairment under the equity method
Carrying value < fair market value, permanently
Dr - Impairment loss on investment
Cr - Investment in securities - equity method
Equity security previously classified as AFS
Reclassify from AOCI to Retained earnings
Trading to Available for Sale/Held to Maturity
Do nothing at reclassification date.
AFS/HTM to Trading
Recognize unrealized gain or loss immediately
AFS to HTM
Record unrealized gain or loss in AOCI. Amortize the gain or loss over remaining life.
HTM to AFS
Record unrealized gain or loss in AOCI.
Cash Surrender Value
Initial entry:
Dr - Insurance expense
Cr - Cash
Once cash surrender value is enforcable:
Dr - Insurance expense
Dr - cash surrender value
Cr - Cash
Dividends:
Dr - Cash
Cr - Insurance expense
Stock Rights
Ability to buy shares of stock at a discounted price
Purchase of stock rights
Dr- Investment in stock rights
Cr - Cash
Exercising stock rights
Dr - Investment in common stock
Cr - Investment in stock rights
Cr - Cash
Stock rights expire
Dr - Loss on expiration of stock rights
Cr - Investment in stock rights
