Investments

Question 1

Equity Securities recorded at what

Answer 1

Fair value when fair value can be readily determined. Dividends from equity securities are included in net income.

Question 2

Exceptions to carrying equity securities at fair value

Answer 2

1. There is significant influence over the investee and the equity method is used
2. The investment will be consolidated and therefore eliminated
3. 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

Question 3

Journal Entry at Purchase equity securities

Answer 3

Investment in XYZ

Cash

Question 4

Journal Entry at balance sheet date

Answer 4

Investment in XYZ

Unrealized gain

Question 5

Journal entry for dividends received

Answer 5

Cash

Dividend income

Question 6

Balance sheet date for loss

Answer 6

Unrealized loss

Investment in XYZ

Question 7

When the equity security is sold

Answer 7

Cash
Realized loss
Investment in XYZ

Question 8

If fair value of security cannot be readily determined then investment is recorded at what

Answer 8

Cost

Any dividends received would be included in net income.

Question 9

Impairment evaluations factors

Answer 9

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

Question 10

Options for carrying debt securities

Answer 10

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.

Question 11

AFS

JE at purchase

Answer 11

AFS securities 1000

Cash. 1000

Question 12

AFS

JE at BS date FV is now $1,250

Answer 12

AFS securities $250

Unrealized holding gain (OCI)250

Question 13

AFS

BS date bond is now worth $950

Answer 13

Unrealized holding loss $300

AFS securities. $300

Question 14

Amortized cost =

Answer 14

Cost basis +/- net unrealized holding gains/losses

Question 15

Held to maturity (HTM) investments are held at what

Answer 15

Amortized cost

Question 16

HTM investments are what

Answer 16

These are debt securities the investor intends to hold until maturity of the investment.

Question 17

Can the fair value option be elected for a held to maturity investment?

Answer 17

Yes

Question 18

Journal entry to record the debt investment

Answer 18

HTM investment 100,000

Cash. 100,000

Question 19

Journal entry for interest income from the investment

Answer 19

Cash 5,000

Interest income 5,000

Question 20

An impairment loss is recognized where

Answer 20

In earnings and the investment is written down to fair value.

Question 21

Equity method investments

Answer 21

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.

Question 22

What method do you use if you don’t have significant influence but still own 21-49%

Answer 22

Use fair value option

Question 23

What method do you use if you own less than 20% and have significant influence

Answer 23

Equity Method

Question 24

Goodwill

Answer 24

Excess of the investment is greater than the proportionate FV of net assets

Question 25

Is goodwill separated from the equity method on the balance sheet

Answer 25

No, it is just included in the investment account

Question 26

If the entity switches to the equity method the change will be applied…

Answer 26

Prospectively

Question 27

Journal entry to record investment

Answer 27

Investment in XYZ $100,000

Cash. 100,000

Question 28

JE for dividends

Answer 28

Cash 3,000

Investment in XYZ 3,000

Question 29

Journal entry for Income

Answer 29

Investment in XYZ $9000
Investment income $9000

Or

Investment loss 9000
Investment in XYZ 9000

Question 30

Equity method investment impairment

Answer 30

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.

Question 31

Preferred stock for equity method

Answer 31

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.

Question 32

If investment is made more than book value

Answer 32

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

Question 33

Financial Assets at Amortized Cost

Answer 33

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).

Question 34

HTM investments evaluated for impairment at each balance date: If a decline in fair value is

Answer 34

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.