Investments Securities

Question 1

Stock Dividend

Answer 1

• Recorded as a memo entry only
  
  • Because when additional stock is issued, the carrying amount per share is affected, but nothing else
  • For Equity method - no liquidation of investment has occurred, and investment carrying value applies to a larger number of shares held by the investor
    The investor only needs to note that the value per share of its investment has decreased and the number of shares has increased

Question 2

Cost Method

Answer 2

• Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions of cost of the investment
  
  • Dividend income is only applicable to the cost method, and not the equity
  • If only part of the dividend received is included in dividend income, and the re
  • D Cash
    ○ C Dividend Income
    ○ C Investment in Ima Court
  • Record at book value

Question 3

Equity Method

Answer 3

• Investment account is reduced by cash dividends, though it does increase cash
  
  • No action is taken when the market value of the investee’s shares changes
  • D Cash
    ○ C Investment in Investee
  • Excess of cost over book value
    ○ D Income from Investee
    C Investment in Investee

Question 4

Available for Sale Securities

Answer 4

• Recognized on the balance sheet at fair value
  
  • Unrealized holding gains and losses are excluded from net income and reported as other comprehensive income
  • However, if decline in value is not temporary, the cost basis of the individual security should be written down to Fair Value and the amount of the write down should be included in earnings
    ○ Applies to Held to Maturity as well
    Cost basis of the individual security should be written down to fair value and amount of write down included in earnings

Question 5

Unrealized Gains/Losses

Answer 5

• Losses - debits because they lower the equity account

When the securities are sold at a loss, the account is removed so the balance is credited

Question 6

323-10-35-16

Answer 6

• If investee has outstanding cumulative preferred stock, investor shall compute its share of earnings (losses) after deducting the investees preferred dividends, where or not such dividends are declared
  Ex - if 10% cumulative pref stock, this is percentage is applied to common stock as well

Question 7

Acquisition

Answer 7

• If purchase price exceeds the fair value of all the company’s net assets, amount of excess is credited as goodwill for the purchase
  
  • Ex: Cost of stock: 200, FV of Identifiable Net assets: 600 Purchase %: 30%
    ○ Cost of Stock - Investment % of Identifiable Net Assets = Goodwill (excess of purchase price over FV of net assets)
    200 - (600 * 30%) = 20