Equity investments at Fair Value

Question 1

What is the main characteristic of an equity security?

Answer 1

Ownership Rights

Question 2

How to you measure equity securities?

Answer 2

ALL are recorded fair value when it is determinable!

Question 3

Where are the FV’s of equity investment securities?

Answer 3

US Securities Exchange

Foreign Market (same breadth of US market)

FV per share is based on current transactions, mutual funds

Question 4

What are the exceptions to the FV requirement?

Answer 4

Not reported at fair value when:

• Significant influence over the entity (equity method)
• Control over the entity (equity method or cost method)

Question 5

For investments that are less than 20% ownership, how are they classified on the income statement?

Answer 5

• Current or non-current
• Gains/losses go to income statement
• investing activity on the SCF

Question 6

What is the journal entry when you purchase?

Answer 6

Investment in Company X DB

Cash CR

Question 7

What is the journal entry if dividends are declared?

Answer 7

Cash DB

Dividend Income CR

Question 8

What if there is a loss on the equity investment

Answer 8

Unrealized loss DB

Investment Company X CR

Question 9

What is the entry to sale of the equity investment?

Answer 9

Cash DB
Investment in Company CR
Realized Gain or Loss DB/CR

Question 10

T/F: You include any brokerage fee in the investment account when recording an equity security rather than expensing?

Answer 10

TRUE– You add the brokerage fees into the cost of the investment.