Investments Flashcards
What is the formula of Credit loss for HTM?
For AFS, we first determine if the Amortized cost is less than the PV.
Credit Loss = BV - PV, BV is amortized cost
Then we see if the FV is mor than the Amortized cost than its is ok we do not record a loss because we still can sell it and avoid that loss. But if FV is less than the BV then the maximum loss will go as Credit Loss calculated by above formula. if there is still some amount left that you to OCI.
Where does the Credit loss for AFS is reported?
The credit loss for an available for sale security is reported as a component of income from continuing operations and not reported net of tax
When Credit loss should be recorded?
Credit loss for an available for sale debt security must be recorded on the income statement when the fair value is below amortized cost but still above the present value of future cash flows.
Write down to FV not PV as is the case with HTM
When AFS security should written down?
When PV is less than BV
Using the current expected loss (CECL) model, when available for sale debt security has a fair value that is below amortized cost, the asset must be written down to the lower fair value by recording a credit loss that is recognized on the income statement. Even though the fair value is above the present value of expected cash flows, and available for sale security can be sold at any time, the credit loss is limited to the difference between cost and fair value.
For trading security where does the unrealized gain and loss go?
Unrealized gain and loss will go to IS
For trading securities, how cash inflow and outflow are reported?
Cash inflow and outflow are in the Operating Section of the Cash flow statement.
What is JE on the date of investing in trading securities?
Investment in Debt Securities – Trading
Cash
What is a year-end JE if there is a loss due to decline in Fair Value
Unrealized Loss on Debt Securities (IS)
Investment in Debt Securities - Trading
So, Investment accounts in Debt Securities” get affected with the loss or gain but not with Interest Income.
What is a year-end JE if there is again due to appreciation in Fair Value for Trading Securities?
Investment in Debt Securities – Trading
Unrealized gain on Debt Securities - Trading
So, Investment accounts in Debt Securities” get affected with the loss or gain but not with Interest Income.
What is JE for receiving the interest on investment for trading securities?
Cash (Operating cash flow)
Interest Income (IS)For AFS, how gains and losses are reported
For AFS, gains and losses go to the OCI
For AFS, what is JE for the loss due to fair value
Unrealized loss on Debt Securities - AFS (OCI)
Valuation Account - FV Adjustment (Contra account)
This loss is reported in OCI, direct to equity.
For AFS, what is JE for the gain due to fair value
Valuation Account - FV Adjustment (Adjunct account)
Unrealized gain on Debt Securities - AFS (OCI)
For AFS, how the loss due to credit deterioration is reported?
Credit Loss Expense (IS)
Allowance for Credit Loss Expense (Contra account)
Credit Loss to IS
Where Credit loss is reported for AFS
***Credit Loss goes to Income Statement
What is JE if Credit Loss is recovered for AFS
If later year it is determined the loss was recovered by some amount that is not greater than original credit loss booked.
Allowance for Credit Loss
Credit Loss Expense
What is Balance Sheet representation for AFS
Balance Sheet Representation Investment is Debt Securities - AFS Less: Unamortized discount Less: Allowance for Credit Loss Less: Fair Value Adjustment (if loss)
What is the JE for actual write off of the Credit Loss for AFS
Now there is an actual write off of the Credit Loss
Allowance for Credit Loss
Investment in Debt Securities - AFS
What is the JE for AFS when it sold and has unrealized gain in OCI
Cash
Unrealized gain
Investment in Debt Securities – AFS
Valuation Allowance
Realized gainWhat is the JE for AFS when it sold and has unrealized loss in OCI
Cash
Realized Loss
Valuation Allowance
Investment in Debt Securities – AFS
Unrealized loss
Verify this entry
What is JE for HTM on day of investment
Investment in Debt Securities – HTM
Discount on Bonds
Cash (ICF)
What is JE for HTM to accrue the interest at yeaer-end
Accrued Interest Receivable
Discount on Bonds
Interest Income
What is Balance Sheet presentation for HTM
Balance Sheet on 31/12
Investment in Debt Securities - HTM
Less: Unamortized Discount
= Investment in Debt Securities - HTM
Do your record a loss on HTM?
Now there are no FV adjustments, but you recognize Credit Loss that goes to IS
Credit Loss Expense
Allowance for Credit Loss
How do you recognize credit loss for HTM
Credit Loss Expense
Allowance for Credit Loss
CECL Model measures all expected credit losses for financial assets as of each Balance sheet date and it is based on historical experience, current conditions, and reasonable and supportable forecasts from data analytics.
Balance Sheet presentation for HTM
Investment in Debt Securities - HTM
Add: Unamortized Premium
Less: Allowance for Credit Loss
= Investment in Debt Securities - HTM
How do you categories HTM for current or noncurrent?
Current asset if maturity is less than one year and non-current if maturity is more than one year.
How to write off HTM Loss
Allowance for Credit Loss – HTM
Investment in Debt Securities - HTM
This write-off does not impact IS but BS only.
JE when the HTM matures
Now Bond Mature:
Cash
Investment in Debt Securities – HTM
What is the formula of Credit loss for HTM?
Since there is not concern about FV. Credit loss calculation will be simply:
Credit Loss = Amortized Cost (BV) - PV
No FV is regarded in this case. FV is distractor.
Write down to PV
What is the JE for Loss that has Loss due to Credit Loss and Fair Value Adjustment
Credit Loss (IS)
Unrealized Loss on AFS (OCI)
Allowance for Credit Loss
Valuation Account - FMA
When you elect Fair value option, how dividend received from the investment in equity are treated?
The dividend are recognized in income. So if there is loss, it is also recognized in income and therefore, they reduce the loss
You bought a bond at discount of 10,000 and amtoritzed the discount of 2,000 then sold for premium of 12,000 what is your gain?
8000 + 12000
=20,000
When you have Both Credit Loss and Unrealized Loss (OCI) on AFS
When PV is below CV (AC) and FV is Below PV
AC
PV
FV
How do you calucalte the investment in bond at the end of year when you bugy during the middle of year.
When you buy a bond during the year and pay the accrued interest, you do not include the discount allocated to that interest.
Example: you bought a bond for 946,000 that included 40,000 accrued interest. At the end of year the discount will be apply for only 6 months
JE
Investment in Bond
Accrued Interest
Cash
Face: 1,000,000
Interest 8%
Yield 10%
Discounted price: 946 - 40 = 906.
