Chapter 5: Cash and Investments

Question 1

What is the carrying amount of an investment?

Answer 1

Original investment + share of earnings - share of dividends

Question 2

When is the equity method not required related to investment classifications?

Answer 2

When the investment is classified as held for sale

Question 3

When is an investment measured at FV at the time of the Balance Sheet?

Answer 3

When an investment does not result in control or significant influence over the investee

Question 4

What methods can be used to measure an investment that the investor has control or significant influence over? And when is significant influence presumed?

Answer 4

Equity method
Fair value option (FVO)
It is presumed when the investor is at least 20% of the investee’s voting interests (common stock)

Question 5

How is equity method goodwill calculated and reported for investments?

Answer 5

The difference between the carrying value of the investment and the underlying equity in the fair value of the investee’s net assets.

NOT a separately identifiable asset, instead included in the carrying value.
JE:

(DB) Investment
(CR) Cash

Question 6

What is the JE for the equity method income from investee?

Answer 6

JE:
(DB) Investment in Company A
(CR) Equity method income - Share of Company A earnings

Question 7

What is the JE for the equity method when an investee declares a dividend?

Answer 7

JE:
(DB) Cash
(CR) Investment in Company A

Question 8

JE to adjust for the difference at the acquisition date between the fair value and the carrying amount of the investee’s net assets

Answer 8

JE:
(DB) Equity method loss
(CR) Investment in Company A

Question 9

What is the change in fair value of an investment made up of for the fair-value option? And where are these changes recognized?

Answer 9

Part 1: Change attributable to instrument-specific credit risk - Recognized in OCI
Part 2: Remaining change - Recognized in Income Statement

Question 9

What are the different classifications for investments in debt securities? And how are they reported?

Answer 9

• Held-to-maturity -> amortized cost
• Trading -> fair value through net income
• Available-for-sale -> fair value through OCI

Question 10

What are the journal entries for fair value re-measurement for Trading Securities and Available-for-sale securities?

Answer 10

Trading securities:
(DB) Unrealized loss on Trading securities (NI)
(CR) Securities fair value adjustment (trading)

Available-for-sale securities:
(DB) Unrealized loss on AFS securities (OCI)
(CR) Securities fair value adjustment (AFS)

Question 11

AFS Impairment can be a result of? And where is that impairment reported?

Answer 11

Credit loss -> Net Income
Market -> OCI
Can be a combination of both depending on if the Amortized cost is less than both the FV and PV of cashflows

Question 12

What if an AFS amortized cost is less than the fair value but not less than the PV of cash flows?

Answer 12

The decline in fair value will be recognized in OCI
(DB) Unrealized loss (OCI)
(CR) Securities fair value adjustment (AFS)

Question 13

What is the JE for an AFS when the amortized cost is more than the fair value and discounted cash flows?

Answer 13

(DB) Credit loss expense
(CR) Allowance for the credit loss
For the difference between the amortized cost and the fair value

Question 14

What is the JE for an AFS remeasurement if the amortized cost is more than the fair value and the fair value is less the discounted cash flows?

Answer 14

The impairment for credit losses is calculated by subtracting the amortized cost minus the discounted cash flows. The remainder comes from the total impairment (amortized cost - fair value) minus the credit loss portion.

JE:
(DB) Credit loss expense - NI
(CR) Allowance for credit losses
(DB) Unrealized holding loss - OCI
(CR) AFS securities fair value adjustment