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INT ACCT 2 > Investing assets > Flashcards

Investing assets Flashcards

1
Q

Define Debt securities

A

investments in the notes or bonds payable issued by another company

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2
Q

What are debt securities functions?

A

The debtor pays both interest (most often periodically) and principal (face amount, par value) at a fixed maturity date.

Corporations invest in bonds to receive periodic interest payments ,and a final payment of the face value.

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3
Q

Define Equity Securities

A

an investment in the common or preferred shares of another company.

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4
Q

What are the functions of equity securities?

A

The investor receives or returns the form of dividends, which are distributions (often cash) of profit (positive retained earnings) that the investee pays to the investor.

The investor could eventually sell the investment for an amount greater than (or less than) its purchase price and earn a gain (or loss) on disposal.

equity securities have no maturity date, so investee is never required to buy back its stock from investor.

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5
Q

Can management hold debt and securities for limited time?

A

no, management must have a reason for holding debt and securities for an amount of time.

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6
Q

What are the types of securities that management does not have influence over?

A

1) Held to maturity securities ( HTM: Debt securities only)
2) Trading securities ( trading: Debt or equity)
3) Available for sale securities (AFS: debt or equity )

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7
Q

When does a company classify a debt security as a held to maturity investment?

A

Intent to hold the debt investment until maturity

Ability to hold the debt investment until maturity.

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8
Q

Define Trading security

A

a short term investment that is either debt or equity .

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9
Q

If security isn’t classified as held to maturity or trading, how is it classified?

A

Classified as available for sale security

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10
Q

What are investments in equity securities?

A

Holding of less than 20% (trading or AFS)

Holdings can be 20% to 50%

Equity method is used

If holding are more than 50% consolidated FS

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11
Q

What are classified as “other reporting issues”?

A

Fair value option

Impairment of value

Reclassifications and transfers between categories

Fair value controversy

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12
Q

What are management’s intentions to invest equity and/or debt?

A

1) earn a high rate of return
2) secure operating or financing deals with other companies
3) Accounting for investments is based on type and intent

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13
Q

What are management’s intentions with debt securities?

A

no plans to sell

plan to sell

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14
Q

What are valuation approaches on debt securities?

A

amortized cost

must be in fair value

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15
Q

What are management’s intentions with equity securities?

A

1) plan to sell

2) exercise some control

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16
Q

What are valuation approaches on equity securities?

A

Fair value

Equity method

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17
Q

What are types of debt securities?

A

u s government

municipal bonds

corporate bonds

convertible debt

commercial paper

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18
Q

What are debt securities’ accounting categories’ valuation?

A

held to maturity (amortized cost)

trading ( fair value)

available for sale ( fair value)

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19
Q

What are debt securities’ accounting categories’ unrealized holding gains or losses?

A

held to maturity (not recognized)

trading ( recognized in net income)

available for sale (recognized as other comprehensive income and as separate component of SE.)

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20
Q

What are debt securities’ accounting categories’ other income effects?

A

held to maturity ( interest when earned: gains and losses from sale).

Trading securities ( Interest when earned: gains and losses from sale)

Available for sale ( interest when earned-gains and losses from sale).

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21
Q

What are equity securities 3 categories of ownership voting percentages?

A

1) no significant ( fair value)
between 0 - 20%

2) Significant influence ( equity value) between 20% to 50%

3) Control ( investment valued on parent books using cost or equity methods ( eliminated on consolidated fin stmts ( cfs)
between 50% to 100%

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22
Q

What are 2 equity securities that are in the category of “ holdings less than 20%”?

A

1) available for sale

2) Trading

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23
Q

Which equity securities categories can declare dividends?

A

available for sale

Trading

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24
Q

In 20% < owned category, what are the guidelines for Market price that is available or not?

A

When MP is available
report fair value

When MP is not available
report cost method

25
Q

Securities are report at fair value?

A

no, at cost.

26
Q

When are gains and losses recognized?

A

at the sale of securities

27
Q

When an investee has 20% to 50% more influence, does investor have more influence than the investee?

A

Yes, he or she must account for the investment by using equity method.

28
Q

Define Equity method

A

record stock at historical cost and adjust each period:

Investor’s share of investee’s NI

Dividends declared by investee.

29
Q

If investor’s share of investee’s losses exceeds carrying amount, what should the investor do?

A

switch to cost or FV method when stock BV is zero.

30
Q

When a investor is majority owner, what is investor’s and investee’s role?

A

investor is referred to as parent co

investee is subsidiary Co

reported on parent’s books and bs as LT investment

Parent generally prepares consolidated FS

31
Q

Define Held to maturity debt securities?

A

HTM debt security investments are recorded at cost and purchases include all costs ( HC concept) of acquiring the asset:

Price of the security plus

Broker’s commissions and fees related to purchase price is identical

32
Q

How is HTM debt calculated?

A

The calculation to determine a HTM debt security’s purchase price is identical to that for issuing a bond.

A bond purchase price is the sum of the present value of bond par value (single sum) plus the present value o f the interest payments (ordinary annuity).

33
Q

HTM Debt’s interest payments that are accrued ?

A

purchasing bonds between interest payment dates, the purchaser pays the seller any accrued interest on the bonds.

Because the interest payment is a part of the bond agreement, the issuing corporation pays the full interest payment to the current bondholder on the payment date regardless of how long he held the bond.

To ensure the purchaser receives the cash related to the interest revenue earned over the period the bonds were held, the seller requires the purchaser to pay for the interest accrued up to the purchase date.

34
Q

When do HTM Debt amortized cost?

A

after purchase

35
Q

Define amortized cost

A

original cost less the unamortized amount of the premium or discount.

separate premiums and discount are generally not used

36
Q

Regarding HTM Debt, when is a discount or premium cost amortized to income ?

A

when effective interest method and historical market rate are used.

37
Q

When do Trading securities report trading?

A

Companies report trading securities:

fair value

unrealized holding gains and losses reported as part of net income

38
Q

Trading securities are amortized at discount only?

A

no, Both at discount and premium cost

39
Q

What are trade securities unrealized gain or loss in NI?

A

trade securities are treated as unrealized gain or loss as adjustments to SE( ocl) not NI.

40
Q

What does a CO report available for sale securities?

A

1) fair value
2) unrealized gains or losses

In other comprehensive income

41
Q

When a company sells available for sale securities, how is it reported?

A

any gains or loss are in NI

42
Q

No significant influence and ready determinable fv; what do companies report

A

equity investments are in fair value ( i.e., readily determinable).

can be trading or available for sale ( not HTM)

43
Q

When are trading ( equity) investments reported?

A

1) revalued at FV
2) reported on BS
3) gain or loss reported in
a) NI
4) reviewed in IS

44
Q

Trading ( equity) securities have dividends to shareowners, how are they reported?

A

1) reports % share as a dividend rev

45
Q

IS AFS ( equity) reported in FV?

A

yes, on the BS

46
Q

Where do the unrealized gains or losses are reported?

A

OCI

BS SE

47
Q

Dividends ( that are declared) are reported?

A

reports % of share as dividend revenue

48
Q

NRD- FV ( equity investments) could be reported?

A

no, these CO are priviate CO. NO market price, No Realized gains or losses

49
Q

When does an investor use the equity method?

A

When investor Co has significant influence over investee Co. Investor Co does not have control.

50
Q

How does equity method effect BS investments?

A

investor Co adjusts Bs investment that increase and decreases in investee Co’s economic resources

51
Q

Define equity method

A

record investment at historical cost and subsequently adjust the investment amount of each period.

52
Q

what are equity method’s adjustments within a period?

A

Increase by the investor’s % CS share of the investee’s NI (decrease by net loss), and

Decrease by the investor’s % CS share of dividends declared by the investee.

53
Q

What are 3 presumptions or evidences for declaring equity method or FV method?

A

If 35% CS is owned, it presumes Investor exercises significant influence over Investee, and Investor uses the Equity Method, absent clearly demonstrated evidence rebutting this presumption.

If Investor has sufficient evidence to show it exercises little or no influence over Investee, the Investor uses the FV Method.

If sufficient evidence to show it controls Investee, Investor generally uses Cost or Equity Methods, and Investor (Parent) includes Investee (Subsidiary) in Consolidated FS.

54
Q

When does signficant influence effect CS?

A

Significant Influence may exist if Investor participates:

As a Member of Investee’s

Board of Directors

In Investee policy-making

In major Investee transactions

In exchanges of Managers with Investee

Is technologically dependent with Investee.

If Significant Influence, Investor uses Equity Method

55
Q

Define fair value option

A

Under the fair value option, companies can elect to value most types of financial assets and obligations at fair value.

56
Q

What are fair value measurements?

A

Level 1 is the most reliable estimates of inputs used, and Level 3 fair value input estimates require the most judgment:

Level 1: Fair values are determined based on quoted prices in active markets for identical assets.

Level 2: Fair values are determined using significant other observable inputs. Other observable input could include securities dealer quotes or prices based on similar assets in other markets.

Level 3: Fair values are determined using significant unobservable inputs. For instance, fair values in this group could be estimated based on pricing models such as discounted cash flows.

57
Q

What is the controversy with the FV method?

A

The FV Method remains a controversial issue:

Measurement Based on Intent - Subjective

Allows Gains Trading (“Cherry Picking”) – reporting unrealized gains on IS & losses on BS.

Liabilities (Bond issues) Not FV (Amortized Cost)

58
Q

Define Impaired security

A

An Impairment of a debt and equity security is:

Loss in value determined to be other than temporary,

Based on a fair value test, and

Appear as Loss on the IS, reducing NI

59
Q

What are 4 steps in imparing testing?

A

There are 4 steps in impairment testing:

1) Determine if there is an impairment loss for the asset. If there is an impairment loss, then move to step 2.
2) Measure the impairment loss.
3) Determine whether to present the loss in net income or other comprehensive income.

4) Assess whether there is a reversal of the impairment in later periods.

INT ACCT 2 (4 decks)

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