Equity and Debt Investments

Question 1

Equity Investment

Answer 1

gives ownership rights

Question 2

Preferred Stock

Answer 2

does not give rights to vote but has other ownership rights: priority over common shareholders dividends, priority in liquidation

Question 3

Redeemable Preferred Stock

Answer 3

Debt Security

Question 4

Debt Securities

Answer 4

NO ownership rights, gives buyer (creditor) the right to receive from the issuer (debtor) principal repayment at specified date and generally receive interest for providing principal

Question 5

Types of debt securities

Answer 5

bonds, notes, convertible bonds and notes, redeemable preferred stock

Question 6

Recognition

Answer 6

an accounting concept, meaning we have reported the item on the financial statements

Question 7

Realization

Answer 7

economic concept, there is a culmination (reach the highest point) of the earnings process and cash or other consideration is given or received

Question 8

Unrealized

Answer 8

earnings process is not complete (the investment has not been sold)

Question 9

Recognized but Unrealized Gain or Loss

Answer 9

a gain or loss that results from holding the investment before its sold, basically change in FV

Question 10

Types Equity Securities

Answer 10

common stock, preferred stock, stock (call or put) options, stock warrants,

Question 11

Fair Value is readily determinable when?

Answer 11

1. On a US exchange or over the counter market
2. On a foreign market with similar breadth and scope as the US market
3. On the FV per share based on current transactions for mutual funds, limited partnerships, venture capital entities

Question 12

Practicability Exception and when is it used

Answer 12

Record equity investments at cost, only applies to equity securities, used when:

1. No readily determinable FV
2. do not qualify for using NAV as a practical expedient

Question 13

Net Asset Value (NAV) as a practical expedient

Answer 13

if investee reports its net assets at FV then FV of any ownership interest in that investee can be determined by calculating investor’s share of Net Asset Value (check notes for example)

Question 14

Factors to consider in the evaluation of potential impairment?

Answer 14

1. A significant deterioration in the earnings performance, credit rating, asset quality, or business outlook of the investee
2. A significant adverse change in the regulatory, economic, or technological environment of the investee
3. A significant adverse change in the general market condition of either the geographical area or the industry in which the investee operates

Question 15

Scenarios where investor with 20% or more ownership may lack significant influence

Answer 15

1. Investee opposes investor
2. Standstill agreement exists (investee can’t purch more shares
3. Other investors own largr % of shares and vote as a block
4. Can’t get representation on Board of Directors

Question 16

Scenarios where investor with less than 20% ownership may have significant influence

Answer 16

1. Has representation on Board of Directors
2. Participates in investee policy making
3. Has material intercompany transaction
4. Is technologically interdependent with investee
5. No other single investor has material voting ownership

Question 17

Stock dividends

Answer 17

receive additional shares of stock as a dividend