Investments - 16 Flashcards
ASC 320, 323, & 825 are what?
320
323 - Equity Method
825 - Fair Value
What three ways can you show investments in bonds on the BS?
- Held to Maturity - Amortized Cost
- Trading Securities - FMV - will have Unrealized Gains/Losses which are shown in I of the IS
- Available for Sale - FMV - will have Unrealized Gains/Losses** which are shown in OCI
**Unrealized Gains/Losses are compared to Amortized Cost at the end of year 1; at the end of year 2, FMV is compared to FMV at the end of year 1 and so on for years 3 and beyond
Accumulated Other Comprehensive Income is what type of account and located where?
Equity Account located on the BS
Do OCI & AOCI have to shown Net of Tax?
Yes
The adjusting journal entry to record unrealized gains/losses on a bond investment for trading or available for sale securities is?
Loss DR
Valuation Adj** CR
**Contra account to investment
Valuation Adj DR
Gain CR
Concept Definition of OCI vs Standard Definition of OCI?
Concept - All changes to SHE that does not involve the owners
Standard - The specific transactions that must go into OCI:
- Unrealized G/Ls from AFS Securities when FVO is not elected
- Foreign Currency Translation Adjustments
- Reclassification Adjustments
- Certain Types of Pension Adjustments
- Unrealized G/Ls on derivatives held as cash flow hedges
If an owner owns more than 20% (but less than 50%) or can exert significant influence on a company, they have to use what method?
The Equity Method
If an owner controls more than 50% of the outstanding stock, how must the stock be recorded?
As a consolidation
In Debt Securities (Bonds), is there significant influence if the bond holders owns more than 20%?
No; you do not own part of the company when buying a bond, but are basically only financing a company
When dealing with securities, what is current vs noncurrent?
Current < 1 year from the BS date
Noncurrent > 1 year from the BS date
Where do trading securities show up on the Statement of Cash Flows?
Either Operating or Investing depending on the nature of the trading security
Note: IFRS only allows trading securities to be put into the Operating section
If transferring Trading Securities to HTM or AFS, what has to be done?
Nothing
If transferring AFS to Trading or HTM, what has to be done?
AFS to Trading - Recognize unrealized G/L immediately
AFS to HTM - Report Unrealized G/L as AOCI & amortize the G/L over the remaining life of the security
If transferring HTM to AFS or Trading, what has to be done?
HTM to Trading - Recognize unrealize G/L immediately
HTM to AFS - Report unrealized G/L as AOCI
When there is significant influence or ownership of 20% or more in a company…?
The equity method must be used
There is no AFS, HTM, or Trading categories
What are the journal entires for dividends?
Less than 20% ownership:
Cash DR
Dividend Income CR
More than 20% ownership:
Cash DR
Investment CR
What is the Equity in Earnings account?
A SHE account that shows all earnings from a company in which you are forced to do the Equity Method.
Will show this in I in other Revenues
Must show loss if there is one.
Gain Ex (Loss would be Reversed):
Investment DR
Equity in Earnings CR
If you own part of a company for a period of time, and then acquire enough shares to own 20% or more (or have significant influence), what must happen?
You must make entries to recognize Investment Income from the prior periods in which you owned the company at that specific percentage
Ex: If you owned 10% in Year 1 & 20% in Year2, you would have to go back to Year 1 and multiply 10% times the NI - Dividends Paid and make an adjusted journal entry
If the FVO is elected for an entity in which ownership is greater than 20%, must the FVO be elected for all securities in that entity?
Yes. The FVO must be elected for all Debt and Equity securities in an entity in which you own more than 20%
Does the FVO bear any weight on how a security is classified on the Statement of Cash Flows?
No. A HTM or AFS security would be classified as an Investing Activity while Trading Securities would more than likely be classified as an Operating Activity
Is Investment Income recognized from Stock Splits or Stock Dividends?
No
Can Stock Rights be sold?
Yes, if they are detachable. If they are detachable, they would need to be classified as a separate security
EX:
Investment in Stock Rights DR
Investment in Common Stock CR
Can you allocate rights from the investment in stock if…?
- If you know the FMV of both the right and the stock and
2. The rights are detachable
How do Cash Surrender Value of Life Insurance whole policies work?
After the first year of paying premiums, part of the premium that is paid starts going towards a cash surrender account. The longer the policy is open, the more of the premium goes into this account
What are the journal entires to record life insurance with a cash surrender account?
Insurance Exp DR
Cash Surrender Value (Plug)
Cash CR
What type of account is the Cash Surrender Value?
A non-current asset unless the company plans to cash in the policy in the next period
The Equity Method assumes that the NI of the company owned is calculated at FMV?
Yes, so if the book value of the assets/inventory are equal to FMV, then you can use the given NI in the Equity Method calculation, but…
If the book value differs from the FMV for assets/inventory, then the NI must be adjusted to account for the difference between book value and FMV
Under IFRS, what categories of securites are available to use?
- Held for Trading
- Available for Sale
- Held to Maturity
Under IFRS, Fair Value Through Profit or Loss (FVTPL) is equivalent to the Fair Value Option under US GAAP?`
Yes
With the exception that if there is no market to determin the FVTPL of an equity security, then the FVTPL cannot be elected
The transfer of any security between categories is always transferred at what value?
Fair Value
For a Stock Dividend, is anything recorded?
No. Only a memo changing the total amount of stock owned in that entity. The amount of investment in that entity does not change, but is evenly distributed over the total amount of new shares owned.
Basically, this raises the amount each share of stock is worth by reducing the cost basis of each share
When is Dividend Revenue acceptable under the Equity Method?
When a company has Preferred Stock
Where should a permanent decline in value on an AFS or HTM security be reported?
In earnings in the IS
The excess of Cost over Book Value is attributed to?
- Excess of Fair Value over Book Value
2. Goodwill
The Excess of Book Value over Fair Value over cost is attributable to?
- Excess of book value over fair value
2. Excess of fair value over cost
Can the Fair Value Method be applied to securities normally accounted for under the Equity Method?
Yes
