Chapter 6 (Unit 5) Investments Flashcards
What are the characteristics for Debt Investments Held-to-Maturity? (4)
Applies to debt securities only (equity securities don’t mature)
Investor must have positive intent and ability to hold the securities until maturity
Fair Value Option is not being elected
Amortized Cost
What is the accounting for Debt Investments Held-to-Maturity?
Carry and report investment at amortized cost, including any premium/discount.
This is regular accounting for a bond but from the investor side instead of the issuer side.
Recognize Interest as it is earned.
Amortize premium/discount over remaining life of security.
Collect face value at maturity.
On July 1, 20x2, Mayer Co. purchased as a held-to-maturity investment a $500,000 8% bond of Cubs Corp., for $461,500 to yield 10% per year. The bonds pay interest semiannually on January 1 and July 1.
a) On December 21, 20x2 what should Mayer report as Investment in Cubs Bonds - HTM?
b) On December 31, 20x2 what should Mayer report as interest income?
c) On December 31, 20x2 what should Mayer report as interest receivable?
July 1, 20x2 JE:
D: Investment in Debt Security - HTM 500,000
C: Cash 461,500
C: Discount on Bonds 38,500
December 31, 20x2 JE:
D: Accrued Interest Receivable 20,000 (500,000 x 0.08 x 1/2 year)
D: Discount on Bonds 3,075
C: Interest Income 23,075 (461,500 x 0.10 x 1/2 year)
a) Investment = 500,000 - unamortized discount (38,500-3,075) = 464, 575
b) Interest Income = 23,075 (carrying amount, effective rate, income statement)
c) Interest Receivable = 20,000 (face amount, stated rate, balance sheet)
Define Current Expected Credit Loss Model
The current expected credit loss (CECL or “Cecil”) model measures expected credit losses as of each balance sheet date.
At each Balance Sheet date, an entity is required to estimate the expected credit loss associated with the debt issuer’s ability or inability to repay the debt to the investor.
Based on historical experience, current conditions, and reasonable forecasts.
What is the journl entry to record the current expected credit loss?
D: Credit loss expense
C: Allowance for credit loss
When a HTM investment is deemed uncollectible, what is the journal entry made to write it off?
D: Allowance for credit loss (remove)
C: Investment in debt security - HTM
Garfield Company purchased, as a held-to-maturity investment $87,800 of the 9%, 5-year bonds of Chester Corporation for $81,310, which provides an 11% return.
Prepare Garfield’s journal entries for:
a) the purchase of the investment
b) the receipt of annual interest and discount amortization. Assume effective-interest amortization is used.
a)
D: Debt Investment 87,800
C: Cash 81,310
C: Discount on Bond 6,490
b)
D: Cash 7,902
D: Discount on Bond 1,042
C: Interest Revenue 8,944
What is the Practicabilty Exception for Equity Investments?
When there is no readily determinable fair value, the investor can elect the practicability exception and use cost (adjusted for impairment and observable transactions) for the investment.
What are Indicators of Impairment in Equity Securities?
Each reporting period the investor must consider the following qualitative factors to assess whether there is a potential impairment.
- Deterioration in the earnings, credit rating, asset quality, or business outlook of the investee.
-Adverse change in the regulatory, economic, or technological environment of the investee.
-Adverse change in the general market condition of either the geographical area or the industry in which the investee operates.
-Indicators that a same or similar investment may be sold for an amount less than the carrying amount of that investment.
-Concerns about the investee’s ability to continue as a going concern (negative cash flows, working capital deficiencies, or noncompliance with debt covenants).
Once an Impairment to an Equity Security is found, how is impairment measured?
The impairment loss is the difference between the carrying value and the fair value of the investment.
Fair value is estimated based on valuation model
When, if ever, can an impairment loss be reversed? (Equity Investments at Cost)
The impairment loss cannot be reversed unless there is a change based on an observable transaction of a similar or identical security.
On January 3, Ubet Co. purchased 300 shares of Not-So-Sure-Thing for $20 per share. NSST paid dividends of $5 per share at the end of June.
a) What is the entry to record the investment in NSST?
b) What is the entry to record the dividend income from NSST?
On July 1, factors indicated that NSST may be impaired and a valuation model determined that the fair value of NSST was $16 per share.
c) What is the entry to record the impairment loss on NSST?
Assume that later in the year a transaction occurred for an entity that was similar to NSST, and that transaction indicated the value of NSST would be $15 per share.
d) What is the entry to record the unrealized loss on NSST?
Assume that Ubet decided to sell NSST because there was an offer to purchase NSST for $18.
e) What is the entry to record the sale?
a)
D: Investment in NSST 6,000
C: Cash 6,000
b)
D: Cash 1,500 (300 shares x $5)
C: Dividend Income 1,500
c)
D: Impairment Loss on NSST 1,200 (income statement)
C: Investment in NSST 1,200
[($20 - $16) x 300 shares = $1,200]
d)
D: Unrealized holding loss 300 (income statement)
C: Investment in NSST 300
e)
D: Cash 5,400
C: Gain on Sale of NSST 900
C: Investment in NSST 4,500
When does the ownership in an equity security investment significantly influence the investing and operating activities?
More then 20% ownership (and less than 50%)
Does Equity Method Accounting use the Fair Value Option?
No.
What factors may limit an investor’s significant influence even if they have 20% or more ownership?
Investee opposes investor.
Standstill agreement exists.
Another investor owns a larger percentage of shares and vote as a “block”
Cannot get representation on Board of Directors
