Financial Instruments Flashcards
What method is used to account for investors with less than 20% of an investee’s common stock?
The fair value method is used when an investor owns less than 20% of and investee’s common stock and does not exercise significant influence over the investee.
The investment is carried at fair value through net income (FVTNI). Earnings of the investee are not recorded by the investor and dividends received are considered to be income and do not affect the investment account.
Sale of Debt Securites
A sale of a debt security from any category results in a “realized gain or loss and is recognized in net income.
The valuation account if used, will have to be removed on the sale of a security.
Stock dividends
There is no income with stock dividends.
The basis per share goes down and the number of shares go up or increase.
Practicability exception (nonpublic)
Allows an entity to measure an equity investment at cost less impairment , plus/minus observable price changes ( in orderly transactions from identical or similar investments from the issuer.
This exception is applicable for equity investments that do not have a readily determinable fair value.
What is the general rule for equity securities?
Equity securities are generally carried at fair value through net income (FVTNI)
TS - FMV - Public
All Gains/losses in income statement
Sale of an available for sale security
The realized gain/loss reported when an available for sale security is sold is the difference between the Selling Price and the original cost of the security.
Any unrealized gains or losses in accumulated comprehensive income must be reversed at the time the security is sold.
Selling Price - Original Cost
How to account for realized gains/losses on a the sale of a trading security?
The realized gain/loss reported when a trading security is sold is the difference between the adjusted cost (original cost plus or minus the unrealized gains or loss previously recognized in net income) and the selling price.
SP - CV (carrying value) at time of sale
Please Note
When making changes to CV if the security:
Unrealized G/L uses Valuation account
ECL uses allowance for credit losses
What is expected credit loss (ECL)?
Expected credit loss is PV - amortized cost.
The difference between present value and amortized cost.
Normal (nonliquidating) dividend - Cash
Dividend from equity investments is recognized in net income
What is a Liquidating dividend?
A liquidating dividend is a distribution that exceeds the investors share of retained earnings. A liquidating dividend is a return on capital ( R.O.C) that decreases the investor’s basis in the investment.
Div.> RE
Net income is not affected and retained earnings in not affected
Net change to balance sheet is zero.
No change to debt or equity
Impairment of equity
FVTNI = loss already on income statement
Practicability exception = Must get loss on income statement
