Chapter 17- Investments

Question 1

Held-To-Maturity

Debt security

Answer 1

Debt securities that the company has the positive intent and ability to hold maturity

Amortized Cost , don’t recognize unrealized gains and holdings. Interest when earned; gains and losses from sale.

Must have: 1. The positive intent and 2. The ability to hold those securities to maturity.

Question 2

Trading

Answer 2

Debt securities bought and held primarily for sale in the near term to generate income on short term price difference. ( Short term assets)

Recognized in net income. Interest when earned; gains and losses from sale

Question 3

Available-for-sale

Answer 3

Debt securities not classified as held-to-maturity or trading securities.

Recognized as other comprehensive income and as a separate component of stockholders equity. Interest when earned; gains and losses from sale.

Question 4

Amortized Cost

Answer 4

Acquisition cost adjusted for the amortization of discount or premium if appropriate.

Question 5

Fair Value

Answer 5

Price that would be received to sell an asset or paid to transfer a liability in a orderly transaction between market participants at the measurement table.

Question 6

Components of amortization table

Answer 6

Date (Can be semi), Cash received (stays the same), Interest Revenue, bond discount/ premium amortization, carrying amount of bond.

“Of 8%”

Question 7

Record purchase of debt investment

Answer 7

Debt investment (debit)(amount paid not face value) 
Cash (Credit)

Question 8

Record interest payment

Held to maturity

Answer 8

Cash (debit)(fv x 8% discount on bond x 6/12)
Debt investment (debit interest revenue)
Interest Revenue (credit)

Question 9

Record interest payment accrued at end of year. (Held to maturity)

Answer 9

Interest receivable (debit) (4,000)
Debt investment (debit)
Interest Revenue (credit)

Also interest receivable is under current assets on balance sheet and the carrying amount for end of year is under long term investments as debt investments (Held to maturity)
And the total interest Revenue for the year is under “other revenues and gain” on the income statement.

Question 10

Record discount amortization ( Held to maturity)

Answer 10

Debt investment (debit) (952 X 4/6)
Interest Revenue (credit)

Question 11

Record sale of bond. (Held to maturity)

Answer 11

Cash (debit) (selling price of bond plus accrued interest)

Question 12

Record end of year holding gain or loss if carrying amount is 106,732 and fair value is 105,000. End of year 2016
(Available for sale)

Answer 12

Unrealized holding gain or loss- equity (debit) 1,732

Fair value adjustment (credit) 1,732

Question 13

Fair value adjustment

Answer 13

Account that enables company to maintain a record of its amortized cost
Record loss as other comprehensive income!

Question 14

When is it a unrealized holding of a Gain or a loss?

Answer 14

Amortized Cost > Fair value = Gain

Amortized Cost < Fair value = Loss

Question 15

Record Sale of loss of on an available for sale security. (Sold for 90,000 and had an amortized cost of 94,214)

Answer 15

Cash (debit) 90,000
Loss on sale of investment (debit) 4,214
Debt Investments (credit) 94,214

Record loss in the “ other expenses and losses” section of the income statement

Question 16

Balance sheet presentation (available for sale)

Answer 16

Current assets- interest receivable
Investments- debt investment (available for sale)
Stockholders equity- Accumulated other comprehensive loss

Question 17

Income Statement Presentation (available for sale)

Answer 17

Other revenues and gains- Interest Revenue

Other expenses and losses- Loss on sale of investments

Question 18

Gains trading

Answer 18

A way for companies to manage their net income by selling their winners and holding the losers

Question 19

Trading securities

Answer 19

Companies report trading securities at fair value, with unrealized holding gains and losses reported as part of net income.
Fasb says to adjust trading securities to fair value.

Fasb says to report investments at fair value on balance sheet and gains and losses on the income statement.

Question 20

Equity Securities

Answer 20

Equity securities represent ownership interests such as common, preferred, or other capital stock. Also include rights to acquire dispose of ownership interests at an agreed upon determinable price such as warrants, rights, and call or put options.

The cost of equity securities include purchase price of the security plus brokers commissions and other fees incidental to the purchase.

Question 21

Percentage of ownership (equity investments)

Answer 21

1. Holdings of less than 20% (fair value method) Investor has passive interest
2. Holdings between 20% and 50% (equity method) Investor has significant influence
3. Holdings of more than 50% (consolidated statements) Investor has controlling interest

Question 22

The equity Method

Answer 22

The investor’s proportionate share of the earnings (losses) of the investors periodically increases (decreases) the investment’s carrying amount. All cash dividends received by the investor from the invested also decrease the investment’s carrying amount.