Chapter 17- Investments Flashcards
Held-To-Maturity
Debt security
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.
Trading
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
Available-for-sale
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.
Amortized Cost
Acquisition cost adjusted for the amortization of discount or premium if appropriate.
Fair Value
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.
Components of amortization table
Date (Can be semi), Cash received (stays the same), Interest Revenue, bond discount/ premium amortization, carrying amount of bond.
“Of 8%”
Record purchase of debt investment
Debt investment (debit)(amount paid not face value) Cash (Credit)
Record interest payment
Held to maturity
Cash (debit)(fv x 8% discount on bond x 6/12) Debt investment (debit interest revenue) Interest Revenue (credit)
Record interest payment accrued at end of year. (Held to maturity)
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.
Record discount amortization ( Held to maturity)
Debt investment (debit) (952 X 4/6) Interest Revenue (credit)
Record sale of bond. (Held to maturity)
Cash (debit) (selling price of bond plus accrued interest)
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)
Unrealized holding gain or loss- equity (debit) 1,732
Fair value adjustment (credit) 1,732
Fair value adjustment
Account that enables company to maintain a record of its amortized cost
Record loss as other comprehensive income!
When is it a unrealized holding of a Gain or a loss?
Amortized Cost > Fair value = Gain
Amortized Cost < Fair value = Loss
Record Sale of loss of on an available for sale security. (Sold for 90,000 and had an amortized cost of 94,214)
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
Balance sheet presentation (available for sale)
Current assets- interest receivable
Investments- debt investment (available for sale)
Stockholders equity- Accumulated other comprehensive loss
Income Statement Presentation (available for sale)
Other revenues and gains- Interest Revenue
Other expenses and losses- Loss on sale of investments
Gains trading
A way for companies to manage their net income by selling their winners and holding the losers
Trading securities
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.
Equity Securities
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.
Percentage of ownership (equity investments)
- Holdings of less than 20% (fair value method) Investor has passive interest
- Holdings between 20% and 50% (equity method) Investor has significant influence
- Holdings of more than 50% (consolidated statements) Investor has controlling interest
The equity Method
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.
