Chapter 17: Investments Flashcards
What are the three types of investments with no significant influence?
- held-to-maturity
- trading securities
- available-for-sale
What are the two types of investments with significant influence?
- equity method
2. consolidation
Investments in debt securities with a maturity date.
held to maturity securities
Type of securities that have an intent and ability to hold maturity.
held to maturity securities
How are held to maturity securities reported?
reported at amortized cost/(face + premium - discount)
How do you record the interest in held to maturities securities using the effective rate method?
- interest revenue: carrying value * market rate
- cash received for interest: face value * stated rate
- difference to discount/premium amortization
Investments in debt or equity securities are known as?
trading securities
Actively managed in a trading account to benefit from short term price changes?
trading securities
In trading securities, fair value changes are unrealized gains/losses in ___.
earnings
How are investments reported in trading securities?
reported at fair value and are current assets
What actions are taken with the sale of trading securities?
- realized gains/losses in earnings
- update FVA and reverse unrealized gains and losses
Investments that are not classified as TS or HTM securities?
available-for-sale securities
Dividends/interest are included in income are in what type of securities?
available-for-sale securities
In available-for-sale securities, fair value changes are unrealized gains/losses in ___.
other comprehensive income (OCI)
Available-for-sale securities are reported at _____ and could be ___ or ___.
fair value; current; noncurrent
What actions are taken with the sale of available-for-sale securities?
- realized gains/losses in earnings
- update FVA and reverse unrealized gains/losses from (OCI)
When adjusting the fair value, trading securities to fair value goes to the ___.
income statement
When adjusting the fair value, available for sale securities to fair value goes to the ___.
other comprehensive income (OCI)
How do you calculate the FVA of an investment?
fair value - discount on bond investment = amortized cost
amortized cost +/- XX = fair value
What type of method includes investors that own 20% to 50% of investee stock?
equity method
In the equity method, the investor can influence financial and operating policies, so this time the investment is recorded at _____ and the investee account is subsequently adjusted.
initial cost
If there is an increase for percentage of investee’s income, then we are going to do this journal entry.
Dr. investment in ABC XX
Cr. investment income XX
If thre is a decrease for percentage of investee dividends, then we are going to do this journal entry.
Dr. cash XX
Cr. investment in ABC XX
When there is a purchase price difference in the equity method, we are going to amortize book value differences on the investee’s book by doing this journal entry.
Dr. investment income XX
Cr. investment in ABC XX
Journal to record the purchase of securities
Dr. Investment in ABC XX
Cr. Cash (% * fair value total) XX
Journal to record ownership % of investee income
Dr. Investment in ABC XX
Cr. Investment revenue (% * NI) XX
Journal to record receive dividends: liquidation of investment
Dr. Cash XX
Cr. Investment in ABC (%* dividends) XX
impairment loss is recorded if _____ is less than _____ and it is considered _____.
fair value; cost; other than temporary (OTT)
What factors are considered to determine OTT?
- length of time market value < cost
- financial condition of issuer and possibility of recovery
- intent and ability to retain the investment to allow for anticipated recovery of the decline
Securities already at FV and gains/losses in income so no additional adjustment needed.
trading securities
Securities that recognize the loss in earnings, reclassifying out of OCI if necessary.
available for sale securities
(Financial Statement Disclosures)
On the balance sheet, the investments can be ___ or ___.
current or noncurrent
(Financial Statement Disclosures)
On the statement of cash flows, trading securities fall in the ___ activities and AFS and HTM fall in the ___ activities.
operating, investing
Investments in debt securities that the investor has intent and ability to hold to maturity.
Held to maturity
Investments in debt or equity securities held in an acitve trading account for immediate resale.
trading securities
Investments in debt or equity securities that do not qualify as HTM or trading.
Available for sale
Investor has significant influence over investee policies. Owns twenty to fifty percent of investee voting stock.
equity method
The investor controls investee. Owns more than fifty percent of the investee voting stock.
consolidation
If the investor elects the _____ , the investment is reported at fair value and unrealized holding gains/losses are included in earnings.
fair value option
What is the treatment of unrealized gains and losses with held to maturity?
- no gains or losses
- not recognized
What is the treatment of unrealized gains and losses with trading securities?
recognized in net income (flows through to retained earnings in equity)
What is the treatment of unrealized gains and losses with available for sale?
recognized in other comprehensive income (flows into AOCI in equity)
How is the investment of held to maturity reported in the balance sheet?
amortized cost
How is the investment of trading securities reported in the balance sheet?
fair value
How is the investment of available for sale reported in the balance sheet?
fair value
What is the cash flow impact for:
- held to maturity
- trading
- available for sale
- held to maturity to investing activities
- trading to operating activities
- available for sale to investing activitites
