Equity and Debt Investments

Question 1

What are the two broad categories of investments?

Answer 1

• Equity Investment

- Debt Security Investment

Question 2

Types of Questions:

Answer 2

1) At Acquisition (determine classification and measurement)
2) Holding Investment (amount reported in net income)
3) At Sale (gain or loss on sale)

Question 3

Investments in Equity Security gives the investor..?

Answer 3

Right to acquire or dispose of an ownership interest. if it gives you the right to ownership, it is an equity investment.

Question 4

Difference between preferred and common?

Answer 4

Preferred stock- cannot vote, have priority in dividends

Question 5

How do you measure equity securities?

Answer 5

1) Do you have significant influence? If No.
2) Is the fair value determinable? Fair Value to Net Income. If no, measure it at cost less impairment.

1) Do you have signficant influence? Yes
2) Fair value option- Yes- Fair Value to Net income.
3) Fair Value Option- No- Equity Method Accounting

Question 6

If you own 0-20% in a company, how do you value the investment?

Answer 6

FV if readily determinable. Cost if there is no readily determinable FV. Noncurrent or current depending on intent to hold.

Question 7

If you own between 20%-50%, how do you measure the investment?

Answer 7

Significant influence. Measure using the FV Option or Equity Method. Presented as a noncurrent asset.

Question 8

If you own more than 50%, how do you measure the investment?

Answer 8

Control. Equity method or cost method.

Question 9

What is redeemable preferred stock?

Answer 9

It acts more like debt security.

Question 10

What is an investment in debt security?

Answer 10

The right to receive from the issuer a principal repayment at a specified date and generally to receive interest.

Question 11

Questions to ask on how to measure debt securities?

Answer 11

1) Yes to Fair Value Option = Fair value to net income
2) No to Fair Value Option:

Ability and intent to hold maturity- Yes. Accounting at held to maturity. Amortized Cost.

Ability and intent to hold maturity- No.  Trading FV or Available-for-Sale at FV.

Question 12

An unrealized gain for debt securities held-to-maturity should be reflected in what part of the financial statements?

Answer 12

A footnote or parenthetical disclosure only