Investments Flashcards
Equity Securities recorded at what
Fair value when fair value can be readily determined. Dividends from equity securities are included in net income.
Exceptions to carrying equity securities at fair value
- There is significant influence over the investee and the equity method is used
- The investment will be consolidated and therefore eliminated
- The fair value of the investment cannot be readily determined. In this case, the investment will be recorded at cost and adjusted for any impairments
Journal Entry at Purchase equity securities
Investment in XYZ
Cash
Journal Entry at balance sheet date
Investment in XYZ
Unrealized gain
Journal entry for dividends received
Cash
Dividend income
Balance sheet date for loss
Unrealized loss
Investment in XYZ
When the equity security is sold
Cash
Realized loss
Investment in XYZ
If fair value of security cannot be readily determined then investment is recorded at what
Cost
Any dividends received would be included in net income.
Impairment evaluations factors
Downturn in the earnings performance, credit rating, business outlook of the investee, or concerns about the ability of the investee to continue as a going concern
If there’s been a downturn in the economic, regulatory, or market conditions the investee operates in
Carrying value - fair value = impairment loss
Options for carrying debt securities
The entity will either classify the investment as trading, AFS, or held to maturity.
If they have the ability and intent to carry the debt securities until maturity, then they will be classified as held to maturity (HTM)
If they don’t have the ability to hold until maturity or don’t plan to hold to maturity, then the investments will be classified as available for sale securities (AFS)
If a debt security is acquired with the intent to sell in the short term then it is classified as a trading security.
For Trading Securities both realized and unrealized gains & losses are recognized in the income statement.
AFS
JE at purchase
AFS securities 1000
Cash. 1000
AFS
JE at BS date FV is now $1,250
AFS securities $250
Unrealized holding gain (OCI)250
AFS
BS date bond is now worth $950
Unrealized holding loss $300
AFS securities. $300
Amortized cost =
Cost basis +/- net unrealized holding gains/losses
Held to maturity (HTM) investments are held at what
Amortized cost
HTM investments are what
These are debt securities the investor intends to hold until maturity of the investment.
Can the fair value option be elected for a held to maturity investment?
Yes
Journal entry to record the debt investment
HTM investment 100,000
Cash. 100,000
Journal entry for interest income from the investment
Cash 5,000
Interest income 5,000
An impairment loss is recognized where
In earnings and the investment is written down to fair value.
Equity method investments
Used when an investor owns more than 20% but less than 50% of voting shares in an entity and/or has “significant influence” over the investee.
What method do you use if you don’t have significant influence but still own 21-49%
Use fair value option
What method do you use if you own less than 20% and have significant influence
Equity Method
Goodwill
Excess of the investment is greater than the proportionate FV of net assets
Is goodwill separated from the equity method on the balance sheet
No, it is just included in the investment account
If the entity switches to the equity method the change will be applied…
Prospectively
Journal entry to record investment
Investment in XYZ $100,000
Cash. 100,000
JE for dividends
Cash 3,000
Investment in XYZ 3,000
Journal entry for Income
Investment in XYZ $9000
Investment income $9000
Or
Investment loss 9000
Investment in XYZ 9000
Equity method investment impairment
Can be evaluated for impairment just like an AFS investment. If the change is considered other than temporary, the investment is written down to FV and a loss is recognized in income.
Preferred stock for equity method
The rules for dividends only apply to the common stock of the investee. If the investor also had preferred stock, dividends received from the preferred stock would be regular dividend income.
If investment is made more than book value
If an investment made is more than the book value for the proportionate amount due to an undervalued intangible asset, as that asset is amortized it will reduce the investment account
Financial Assets at Amortized Cost
HTM debt investments are reported at amortized cost. These are debt securities that the investor intends to hold until maturity of the investment. The fair value option can be elected for a held to maturity investment, and if so then fair value rules apply.
The investment is recorded at cost (includes brokerage or transfer fees if applicable). Unrealized gains and losses aren’t tracked or measured for HTM investments.
Interest income is recognized in earnings (income statement).
HTM investments evaluated for impairment at each balance date: If a decline in fair value is
1) below amortized cost and 2) the decline in value is considered other than temporary, the entity evaluated the investment according to the current expected credit loss model (CECL). This model is based on historical experience and business outlook of the investee, market conditions in which the investee operates, and forecasts related to the investee to come up with all the expected credit losses on an investment
The expected credit loss amount is then used to create a valuation allowance that is a contra account to the HTM investment. This amount is debited to credit loss expense on the income statement and then credited to allowance for credit loss the contra account which lowers the amortized cost amount on the balance sheet.
