Investments

Question 1

Held to Maturity

Answer 1

• Can and Intends to hold to maturity
• Record at cost
• Use amortized costs
• Recognize interest earned
• No gain/loss on I/S
• B/S - current if matures in less than 1 year, otherwise not current
• C/F - Investment

Question 2

Trading

Answer 2

• Sell in near term
• Record at cost
• Fair Mkt Value
• Gain/Loss on I/S
• B/S - current
• C/F - Operating

Question 3

Available for Sale

Answer 3

• Not HTM or Trading
• Record at cost
• Fair mkt value
• Int & Dividends reported as earnings
• Gain/Loss on OCI - Owners Equity
• B/S * current or non current
• C/F - Investment

Question 4

Significant Interest

Answer 4

• 20% to 50% interest generally
• Record at cost
• Equity classification
• Equity method
• No gain/loss on I/S

Question 5

Controlling interest

Answer 5

• > 50% of voting stock
• Record at cost
• Subsidiary
• Consolidated statements

Question 6

Treatment of Losses

Answer 6

Permanent Loss - AFS securities
- Recognized in earnings because probable (Net Income)
Non Permanent Loss - AFS securities
- Direct reduction to equity in Investments AFS

Question 7

Cost method

Answer 7

Equities only with no significant influence or determinable fair value

• B/S at cost
• Dividends in earnings
• C/F Investing activity

Question 8

Cost method

Answer 8

Equities only with no significant influence or determinable fair value

Question 9

Transfers between categories

Answer 9

Change in intent or ability

Question 10

From HTM to AFS

Answer 10

AFS established at FV, unrealized gain/loss recorded in ACOI

Question 11

From AFS to HTM

Answer 11

HTM account established at FV, unrealized gain/loss in ACOI is amortized over life of security

Question 12

Trading to HTM

Answer 12

Establish HTM account at FV, unrealized gain/loss is recognized as income (VERY RARE)

Question 13

Trading to AFS

Answer 13

Establish AFS account at FV, unrealized gain/loss recognized as income (very rare)

Question 14

HTM to Trading

Answer 14

Establish trading account at FV, unrealized gain/loss recorded in income

Question 15

AFS to Trading

Answer 15

Establish trading account at FV, unrealized gain/loss in ACOI is recognized as income

Question 16

Revenue (Loss) Recognized - Equity Method

Answer 16

= Investor’s share of investee’s income/loss (after eliminating its share of any intercompany profits/losses in assets) - “Depreciation/Amortization” of investment cost > book value, OR + “Depreciation/Amortization” of book value > investment cost = Net Revenue/Loss Recognized

Question 17

(Equity) Investment in Investee X (on Balance Sheet)

Answer 17

Original cost of Investment | Pro rata share of investee’s income since acquisition | Pro rata share of investee’s losses since acquisition Amortization of book value in excess of cost (i.e., on amounts allocated to write down nonfinancial assets) | Amortization of cost in excess of book value (i.e., on amounts allocated to identifiable assets, but not Goodwill) Retroactive adjustment due to change from Fair Value to equity method (DR or CR) | Pro rata share of investee’s dividends declared | Impairment losses | Disposal of investee stock (write off)

Question 18

Investment (Equity) Revenue, Investee X (On I/S)

Answer 18

Pro rata share of investee’s losses since acquisition | Pro rata share of investee’s income since acquisition Amortization of cost in excess of book value (i.e., on amounts to identifiable assets, but not Goodwill) | Amortization of book value in excess of cost (i.e., on amounts allocated to write down non-financial assets)

Question 19

Differences IFRS & GAAP

Answer 19

IFRS - uses “associates, reserve accounts, must use same accoutnting polices, must adjust for losses immediately even if immunient return appears assured and must change from equity method to available for sale as soon as decision is made, impairment measured over recoverable amount instead of FV.

Question 20

Journal Entries

Answer 20

Recognized share of Investor reve
Debit Investment x
Credit Investment revenue

Recongizee div on common stock
Debit Dividends receivable
Credit Investment X