Chapter 16 - Investments

Question 1

What do companies account for investments based on?

Answer 1

• type of security (debt or equity)
• their intent with respect to the investment

Question 2

What do debt securities represent

Answer 2

a creditor relationship

Question 3

What are the type of debt investments

Answer 3

• US government securities
• municipals securities
• corporate bonds
• convertible debt
• commercial paper

Question 4

When should a debt security be classified as held-to maturity

Answer 4

when a company has both the intent and ability to hold security to maturity

Question 5

how are HTM securities accounted for

Answer 5

amortized cost using effective interest method

Question 6

How are HTM securities reported on B/S and I/S

Answer 6

B/S
interest receivable
debt investment
I/S
interest revenue

Question 7

what is the though process for a HTM that is sold

Answer 7

1 How much cash are they getting

how much they are getting from sale + accrued interest for period not accounted for (cash received x months)

Question 8

companies report available-for-sale securities at…

Answer 8

Fair value with an unrealized holding G/L to OCI

Question 9

If a company sells bonds before maturity date what happens

Answer 9

remove debt investment at amortized cost

realize a gain/loss in the I.S

Question 10

can there be a fair value adjustment bal. for an investment that was sold

Answer 10

no so if it is a singular investment you must true up the account to 0 at the year end

Question 11

Companies report trading securities at:

Answer 11

Fair value with unrealized GL reported to N.I

Question 12

what is a holding G/L

Answer 12

the net change in FV of a security from one period to another exclusive of dividend or interest revenue recognized but not received

Question 13

What do investments in equity securities represent

Answer 13

ownership of capital stock

Question 14

what are the cost included in equity securities

Answer 14

• the price of security + broker commission fees related to the purchase

Question 15

What determines the accounting treatment for equity investments subsequent to aquistion

Answer 15

degree of which investor acquires an interest in the common stock

Question 16

If an investor has passive interest how is the equity investment accounted for

Answer 16

Fair value method

Question 17

If an investor has significant influence how is the equity investment accounted for

Answer 17

Equity Method

Question 18

If an investor has controlling interest how is the equity investment accounted for

Answer 18

consolidated financial statement

Question 19

0-20% ownership

Answer 19

passive interest

Question 20

20%-50%

Answer 20

significant influence

Question 21

50-100%

Answer 21

controlling interest

Question 22

What are the entries for passive interest

Answer 22

equity investment
cash

cash
dividend revenue

fair value adjustment
unrealized holding G/L - NI

Question 23

If their is less than a 20% ownership of shares and FV is not readily determinable what do you do

Answer 23

report the investment using practicability exception

Question 24

What are all J.E for the equity method

Answer 24

equity investment
cash

cash
equity investment

adjust for investors proportionate shares of the earnings so…

equity investment
investment income

Question 25

in the equity method if the investee’s losses exceed the carrying amount what should the investor do?

Answer 25

discontinue applying the equity method and not recognize additional losses

Question 26

what is the definition of controlling interest

Answer 26

investor corporation (parent) requires a voting interest of more than 50% in investee (subsidiary)

Question 26

What is the Fair Value Option

Answer 26

companies have the option to report at fair value with all GL related to changes in fair value reported to N.I

Question 27

when is the option to report at Fair value option

Answer 27

one time at the acquisition and can not change after they decide

Question 28

what is the journal entry for a company that decides to report at Fair Value Option

Answer 28

debt investment
unrealized holding G/L - I

Question 29

how does Fair value options affect debt equity

Answer 29

treat them all as trading investments

Question 30

when a company expects a HTM debt investment to be impaired what does it do

Answer 30

records a bad debt expense at expected credit loss

if permanent: write off investment

Question 31

when a company expects a AFS debt investment to be impaired what does it do

Answer 31

records bad debt expense only to the extend of the fair value loss (since they are able to sell it)

-write off if permanently impaired

Question 32

what happens if an equity is permanently impaired?

Answer 32

recognize a loss

loss on investment
equity investment

Question 33

what happens if there is a temporary impairment in an equity investment

Answer 33

record it as a normal fair value adjustment

Question 34

If a company transfers a security what happens

Answer 34

the transfer happens at fair value and