Investments Flashcards
Cost Method- Percentage of Ownership, and what does this method imply of the investor?
- 0-20% ownership
- Implies that there is no influence over the investee
Equity Method - Percentage of Ownership, and what does this method imply?
- 20-50%
- Implies that the investor has significant voting influence over the investee
- More consistent with accrual accounting
Equity Method -Investment is recorded initially at:
Cost
Value changes every year based on earnings
Equity Method- As investee earns money, the investor records what?
-Earnings based on the percentage of ownership : “Equity in Earnings” - recorded on the I/S as continuing operations
Equity Method- Treatment of Dividends Received
Considered reduction of the investment account and do not show on the I/S
Equity Method- Differences between the purchase price paid for the investee and the book value of the investee’s net assets are accounted for how?
FMV write up of assets
- PPE (depreciated against equity based on life of asset)
- Assets (eg. Land & Invent) -written off against reported income at the time the asset is sold
- Goodwill (amt initially recorded will later reduce reported income in periods that impaired losses recognized)
Preferred Stock Investments - Income is equal to what?
Preferred Stock under the Equity Method is equal to the dividends allocated to it
For non-cumulative preferred stock, equal to annual dividend preference regardless of payments in the year
Cost Method - Investment is recorded initially at:
Cost
(Value does not change as investee earns money)
- Doesn’t follow accrual accounting b/c not recog. revenue but amt is small enough generally to be ok
Cost Method - As Investee earns money, the investor records what?
Nothing - the investment is kept at COST
Cost Method - Treatment of Dividends Received
-Record as Dividend Income on the Income Statement
(not a reduction of the Investment)
-If dividend is more than the investor’s proportionate share of investee’s income, then it is recorded as a reduction of the investment (rare)
Cost Method- Differences between the purchase price paid for the investee and the book value of the investee’s net assets are accounted for how?
Not taken into consideration
If investee declares a stock dividend instead of cash dividend, what is the accounting treatment?
The CV of the investment is allocated over the increased quantity of securities
Ex: 100 shares @ $22 = $2,200
10% Stock Dividend = 110 shares
$2,200/110 = $20
Change From Equity to Cost (40% to 10%) - Accounting Treatment:
If investor sells a portion of investment and loses significant influence, the remaining investment is accounted for under the cost method from that point forward
Change From Cost to Equity (10% to 40%)
If investor gains significant influence - the change is made retrospectively, and requires prior period adjustments to reported income.
Fair Value Election - Accounting Treatment for Instruments on the Equity Method
Securities are revalued to fair value and any gain or loss is recorded in earnings for the period
Can be elected on date investment is recognized - then it is irrevocable
3 Types of Marketable Securities
Trading Securities
Available for Sale Securities
Held to Maturity Securities
Investments are categorized based on management’s intentions.
Trading Securities (HFT- Held For Trading)
Investments in Equity Instruments (stocks, options, bonds) in an attempt to make profits by buying/selling in ST
Current Assets
Available For Sale (AFS)
All investments in marketable debt or equity that do not meet the definition of HTM or Trading Securities
Classified as Current or Non-Current (depending on expected sale date)
Held To Maturity (HTM)
Investments in bonds and other debt instruments which the investor has the ability and intent to hold until the due date for repayment.
Non-Current (unless maturity is less than a year)
Trading Securities- Investment is initially recognized at, and carried at:
Initially recorded at cost, carried at FMV
Trading Securities- Unrealized Gains and Losses recorded on the:
Income Statement (these are temporary differences)
Trading Securities - Activity recorded where on the Cash Flows Statement?
Operating Activity, if current
Can be either operating or investing, based on the nature and purpose for which the securities were acquired.
AFS: Initially recorded at? Carried at?
Initially recorded at Cost
Carried at FMV
AFS: Debt, Equity or Both?
Debt and Equity
AFS: Current or Non-Current, or both?
Current OR Non-Current
AFS: Unrealized Gains/Losses recognized on:
Balance Sheet as Comprehensive Income
AFS: Realized Gains/Losses recognized on:
Income Statement
AFS: Activity recorded where on Cash Flows Statement?
Investing Activity (since the transaction is not meant for ST gains like Trading Securities)
If any debt or equity security experiences a loss that is considered ‘other than temporary’ - accounting treatment:
Write down to a new cost basis and treat loss as a realized loss on the income statement
When is an investment considered to be impaired?
FV < CV
When is an impairment considered “other than temporary?”
Impairment should be recorded unless:
- Investor has the ability and intent to hold an investment for a reasonable period of time sufficient for a forecasted recovery of FV up to the cost of the investment
- Evidence indicating that the cost of the investment is recoverable within a reasonable period of time
Reclassify from Trading to AFS:
- Reclassify at FMV
- Difference is treated as Realized Gain/Loss on I/S
- Eliminate any related valuation allowance accounts
Reclassify Between Held to Maturity and AFS
- Reclassify at FMV
2. Unrealized Gains/Losses - OCI on BS
HTM: Initially recognized at? Recorded at?
Initially recorded at cost
Carried at Amortized Cost (Face net of unamortized discount or premium)
HTM: Current or Non-Current?
Non-Current (unless maturity date is less than a year)
HTM: Debt (Bonds) or Equity?
Bonds only
HTM: Unrealized and Realized Gains/Losses- accounting treatment
Since HTM are not going to be sold, fluctuations in the mkt are ignored.
Unrealized Gains/Losses - not recorded
Realized Gains/Losses - shouldn’t happen but can - record on I/S
HTM: Activity recorded where on Cash Flows Statement?
Investing Activity
Fair Value Election - Accounting Treatment for AFS unrealized gains/losses
Reported on the Income Statement rather than OCI
Fair Value Election - Accounting Treatment for HTM
The company would no longer report the investment at amortized cost. Instead HTM would be marked to FV at the end of the period, and the resulting unrealized gains/losses would be reported on the I/S
