Accounting for Securities & Investment Flashcards
What are trading securities
Trading Securities: Management actively intends to trade these securities for profit.
Accounted for at fair value, with any gain or loss running through the current year’s earnings on the income statement.
What are Held to maturity securities?
HTM securities can only be debt securities.
HTM securities can be classified as either short- or long-term assets on the classified balance sheet depending on the maturity of the debt security
They are accounted for at an amortized cost.
What is amortized cost?
Amortized cost is defined as the cost of the security plus an unamortized premium or less any unamortized discount.
Available for sale securities
Available-for-sale (AFS) securities may be either debt or investment securities, or a current asset or long-term asset, depending on the intent of management.
AFS securities are investments not classified as either trading securities or HTM securities and are recorded at fair value.
Fair value option
A recent change in accounting rules now allows American companies to account for financial assets such as investments at fair value. This is known as the fair value option.
The fair value option requires any change in fair value to be recorded in the current earnings of the company.
significant influence
If your company owns between 20% and 50% of the outstanding voting shares of another company, your company is said to have significant influence over the second company.
Must use the equity method of accounting for the investment.
This accounting records the owner’s company pro-rata share of the income or loss of the owned company and reduces its investment in the owned company by any dividends received.
controlling influence
If your company owns over 50% of the voting shares of another company, your company is said to have controlling influence over the owned company.
Your company, along with the owned or subsidiary company, must present consolidated financial statements. The financial statements of both companies are combined, and any intercompany transactions are eliminated. The consolidated financial statements present both companies as if they were one economic entity.
Short term investments
Those investments that an owner can access quickly, have low risk, and will mature in the form of cash within a year.
These are often used as a way to make a safe yet small return. An investment must be liquid to be short term. This means that prices can’t be manipulated by one buyer or seller, and the asset is readily accessible.
Types of short term investments
Money markets, which are accounts that involve exchanges among financial institutions and companies, not individuals, and feature exchanges that range from $5 million dollars to a billion dollars.
Savings accounts, which are low-risk deposit accounts held by a bank that provide the owner a small rate of interest.
Certificates of deposit, or CDs, which are promissory notes from banks that have specific maturity dates and interest rates.
Treasury bills, or T-bills, which are owed to the purchaser by the U.S. government.
Government bonds, which are debts put forth by the government to fund its budget.
Suppose a company makes a $100,000 investment for a 25% ownership of a second company at the beginning of the year. The second company pays total dividends of $10,000 to all its shareholders and has net income of $20,000 for the year. (Equity Method of Accounting)
The equity method journal entries are:
Dr. Investment in Company X 100,000
Cr. Cash 100,000
To record the initial 25% ownership of Company X.
Dr. Cash 2,500
Cr. Investment in Company X 2,500
To record 25% of the dividends paid by Company X.
Dr. Investment in Company X 5,000
Cr. Investment Income 5,000
To record 25% of the annual income of Company X.
