Investments Flashcards
Acct 202 ch 16
Debt Securities represents
A creditor relationship w/ another entity
Debt Investment classification categories
- Held to Maturity
- Trading
- Available for sale
Debt securities held to maturity are reported at…
Amortized cost
Do debt securities held to maturity recognize unrealized holding gains or losses?
No
Debt securities that are available for sale are reported at…
Fair Value
Do debt securities that are available for sale recognize unrealized holding gains or losses?
Yes, as other comprehensive income separate from stockholder’s equity
The trading period for debt securities tend to be…
3 months
Debt securities intended for trading are reported at…
Fair Value
Do debt securities intended for trading recognize unrealized holding gains or losses?
Yes, in net income
What are the other income effects for all 3 classifications?
- Interest when earned
- Gains and losses from sale
Amortized cost
The acquisition cost adjusted for amortization of discount or premium
Fair value
The price received to sell an asset
In order to classify a debt security as held to maturity, a company must have…
The positive intent and ability to hold these securities to maturity
Why do companies use held to maturity securities?
- To earn a spread on a difference between interest revenue and interest expense
- To diversity their investment portfolio
- To eliminate unpredictability in reported earnings or capital
Amortized cost accounting recognizes…
Interest revenue as the primary earnings of the company
J/E to record purchase of a bond held to maturity
Dr Debt Investments
Cr Cash
The use of the _____________ is more easily applied w/ the net method instead of using a separate discount or premium account as a valuation account
Effective interest method
J/E to record first semiannual interest payment
Dr Cash
Dr Debt Investments
Cr Interest Revenue
J/E to record accrued interest + amortization of a bond discount
Dr Interest Receivable
Dr Debt Investments
Cr Interest Revenue
J/E to record sale of investment before maturity date, assuming there is a gain on sale of investments
Dr Cash
Cr Interest Revenue
Cr Debt Investments
Cr Gain on sale of investments
J/Es to record sale of investment before maturity date, assuming there is a loss on sale of investments
Dr Cash
Dr Loss on Sale of Investments
Cr Interest Revenue
Cr Debt Investments
Available for sale securities are debt securities that are…
Neither held to maturity nor for trading
Why do companies hold available for sale securities?
- Provide income + capital gains for a long period of time
- Reduce risk by diversifying their investment portfolio
- Provide liquidity in situations where cash is needed
J/E to record fair value adjustment for an available for sale security, assuming a loss
Dr Unrealized holding gain or loss - Equity
Cr Fair Value Adjustment
J/E to record fair value adjustment for an available for sale security, assuming a gain
Dr Fair Value Adjustment
Cr Unrealized holding gain or loss - Equity
Using an unrealized holding gain or loss - Equity account means the amount is reported under…
other comprehensive gain or loss
J/E for selling available for sale securities, assuming a loss on sale of investments
Dr Cash
Dr Loss on Sale of Investments
Cr Debt Investments
J/E for selling available for sale securities, assuming a gain on sale of investments
Dr Cash
Cr Gain on Sale of Investments
Cr Debt Investments
Companies use trading securities to…
- Generate profits from short term differences in price
- Provide liquidities
Companies report trading securities at _____, with unrealized holding gains and losses reported as _______
fair value, part of net income
A holding gain or loss is the net change in…
the fair value of a security from one period to another
Equity Securities
Represents ownership interests via stock
The classification of equity investments depends on the…
Percentage of the investee’s voting stock that’s held by the investor
The fair value method is used if the investee’s holding percentage is…
Less than 20%
The equity method is used if the investee’s holding percentage is…
Between 20% and 50%
For holdings less than 20%, unrealized holding gains or losses are…
Recognized in net income
For holdings between 20% and 50%, unrealized holding gains or losses are…
Not recognized
For holdings less than 20%, dividends are reported as…
Income under the income statement
J/E to record net unrealized losses to changes in fair value of securities
Dr Unrealized Holding Gain or Loss - Income
Cr Fair Value Adjustment
J/E to record net unrealized gains to changes in fair value of securities
Dr Fair Value Adjustment
Cr Unrealized Holding Gain or Loss - Income
If an investee has holdings between 20% and 50%, it means they have _____ influence over the company
significant
Equation for computing carrying value of equity investment
Cost of shares +- investor’s % share of net income or loss - Dividends
J/E to purchase equity investments
Dr Equity Investments [investee]
Cr Cash
J/E to record an investee’s share of net income
Dr Equity Investments [investee]
Cr Investment Income
J/E to record investee’s reduction in their investment account for dividends received
Dr Cash
Cr Equity Investments [investee]
