Chapter 12: Part A Flashcards
Debt
bonds and notes
Equity
common and preferred stock
3 types of investments for ownership less than 20%
Held to maturity
Trading security
Available for sale
20% < investment < 50%
Equity method
50% < investment
consolidation
HTM is reported at cost
amortized on BS
TS are reported @
face value
AFS reported @
face value
unrealized G/L of TS reported on…
current period earnings on IS
retained earnings @ shareholders equity
Unrealized G/S of AFS reported on…
OCI (shareholder’s equity)
investment revenue from debt
interest
investment revenue from equity
dividends
Fair Value option
when HTM & AFS become TS
on maturity date of HTM it is called
principal or face amount
journal entry for purchase of HTM
(debit) Investment in HTM - face amount
(credit) discount - difference
(credit) cash - amount paid, PV calculated
Market value of a fixed HTM relative to market rate
opposite
effective interest method (for discount HTM)
effective market rate
* outstanding balance
= investment revenue
first entry for HTM discount bond (dec 31)
(debit) cash
(debit) discount
(credit) investment rev
you do not recognize what for HTMs
unrealized holding gains and losses
When the market rate of HTM decreases (making it a premium) therefore changing the FV/Pv. What do you do?
you do not recognize the change in FV. Instead you report it on the BS or IS, as long as temporary. The HTM will still be recorded at amortized cost (outstanding balance). not unrealized holding gains/losses
trading securities are recorded at
cost = total amount paid + brokerage fees
journal for purchase of ‘TS’
(debit) investment in bond
(credit) discount
(credit) cash
recognizing revenue for ‘TS’
(debit) cash
(debit) discount
(credit) investment rev.
TS is recognized by what on BS
fair value
how to determine the UNrealized g/s of a TS
identify the amortized cost, then determine the FV adjustment (outstanding bal. - new FV value = FV adjustment)
sale JL for TS
(debit) cash
(debit) discount
(credit) investment in bond
(credit) gain on sale
What happens when a TS is sold (gains/losses)
all unrealized become realized, therefore removed and on net income
effects of TS on the IS
FV changes included whether unrealized or realized and does NOT affect AOCI
effects of TS on the BS
FV is in current assets and does NOT affect AOCI on shareholders equity
effects of TS on the CF
operating activity, unless not held for sale in near term it is investing activity
AFS effects on IS
Realized on NI
Unrealized on OCI
AFS effects on BS
investments at fair value
unrealized on AOCI under shareholder eq.
AFS effects on CF
investing activity
journal entry for unrealized loss in FV adj for TS
(debit) net unrealized holding g/s (IS)
(credit) Fair value adjustment
new balance in FV adjst for TS
(debit) Fair value adjustement
credit) net unrealized holding g/l (IS
HTM/AFS -> TS
unrealized g/l are recognized in current earnings
TS -> HTM / AFS
all gains and losses already accounted for
HTM -> AFS
no current income effect but unrealized in OCI
AFS - > HTM
No current income effect, but amortize gains and losses in OCI with any bond premium/discount over remaining life of the security.
Fair Value Option
unrealized gains and losses are recognized in the net income in the period which they occur. It is IRREVOCABLE.
when HTM / AFS use Fair value option.
they become investing activities not operating
