CH12: Investments

Question 1

What reporting method is used for the following Investments: 1. Insignificant influence (<20%), 2. Significant influence (20-50%), 3. Full control (>50%).

Answer 1

1. a. if there is a positive intent and ability to hold: HTM, at amortized cost w/o recognizing gains/losses, b. if Held in active trading account: TS, at fair value w/ unrealized gains/losses included in NI, c. If other: AFS, at fair value w/ unrealized gains/losses included in Other Comprehensive Income. 2. Equity Method: Investment cost adjusted for earnings and dividends. 3. Consolidation: Financial Statements are combined.

Question 2

HTM: Under what account is the difference b/w the face-value of the investment and the price (cash) paid for it is recorded? What does it represent?

Answer 2

Under the: Discount/premium on bond investment. It is the discount amount gained when purchasing the bond. It is reduced each time interest is paid, as it make up the difference b/w the relatively low rate of interest that the bond pay (Ex. 12%) and the higher rate of interest that the market demands (Ex. 14%). So by the time the bond is paid off, the price paid is equal to the Face-value.

Question 3

What are the entries used to sell a HTM bond (which is not probable)?

Answer 3

Dr. Cash Dr. Discount Cr. Investment account Cr. Gain on sale

Question 4

TS: Adjusting to fair value entries:

Answer 4

First period’s adjustment (if it value decreased): Dr. Net realized gains and losses… *Fair-value - Amortized cost* Cr. fair value adjustment… // Second period’s adjustment: (adjust the above accounts to reflect the new value decrease)

Question 5

AFS: Where realized gains/losses and unrealized gains/losses are shown?

Answer 5

realized g/l: in NI when sold Unrealized g/l: in OCI, until sold and then moved to NI.

Question 6

comparing approachs to recording investments:

Answer 6

Question 8

Under fair value approach, how would one account for HTM and AFS securities?

Answer 8

Treat them like a TS.

Question 9

In consolidated statements, what is goodwill?

Answer 9

it is the difference between the aquisition price and the sum of the fair values of the acquired net assets is recorded as good will.

Question 10

What is equity method(also one line consolidation)?

Answer 10

It reports the investor’s equity interest in the investee as a single investment account.

It increases by the investor’s % share of the investee’s net income.

Decreased by dividends paid.

Question 11

Change of condition: when there is a shift from equity method to another method, what changes/adjustments are aplied?

Answer 11

None! The equity method is discontinued and the balance in the investment account will serve as the cost basis for writing investment up or down for fair value.

Question 12

Change of condition: when there is a shift from another method to equity method, what adjustments need to be applied?

Answer 12

The investment account should be retroactively adjusted to the balance that would have existed if the equity method always had been used. Financial statments previously reported needs to be restated for comparitive reasons.

Question 13

Graph: Compare fair value to equity method:

Answer 13