Cost Method and Transfers between classifications

Question 1

When can the cost method be used for an equity investment?

Answer 1

When the investor cannon exert significant influence over the investee and there is no readily determinable fair value of the investment. Most cases cost method is used if investee is privately held company

Question 2

How is the initial investment recorded under the cost method?

Answer 2

At historical cost

Question 3

When is an investment adjusted from historical value under the cost method?

Answer 3

When there is a

1. )liquidating dividend - dividends declared by investee are in excess of the earnings of the investee since acquisition by investor
2. )permanent decline in value (investment goes into bankruptcy) a permanent write down is required

Question 4

How do we account for the transfer of an investment from available-for-sale to held-to-maturity?

Answer 4

1. )Credit available-for-sale at recorded fair value;
2. )Debit held-to-maturity at current fair value;
3. )Unrealized holding gain/loss stays in Accumulate Other Comprehensive Income in Shareholders’ Equity
4. )Unrealized holding gain/loss at date of transfer amortized over remaining life of debt

Question 5

How do we account for the transfer of an investment from held-to-maturity to held-for-trading?

Answer 5

1. )Credit held-to-maturity at unamortized cost;
2. )Debit Trading at fair value;
3. )Recognize unrealized holding gain/ loss in net income

Question 6

What causes transfers between classifications for investments which do not give the investor significant influence?

Answer 6

Changes in investor intent or Changes in investor ability to hold-to-maturity

Question 7

How do we account for the transfer of an investment from held-to-maturity to available-for-sale?

Answer 7

1. )Credit held-to-maturity at unamortized cost;
2. )Debit available-for-sale at fair value;
3. )Unrealized (holding) gain or loss to Other Comprehensive Income.

Question 8

How do we account for the transfer of an investment from held-for-trading to held-to-maturity or available-for-sale?

Answer 8

1. )Credit Trading at recorded fair value;
2. )Debit held-to-maturity or available-for-sale at current fair value;
3. )Recognize unrealized holding gain/ loss in net income.

Question 9

When investments are transferred between classifications what valuation basis is most likely to be used when recording the investment in the new classification?

Answer 9

Fair Market Value