Lecture 4: Marketable Securities Flashcards
Marketable Securities
ASC
Assume ownership in another entity is 0-20%. When an investment is made in securities (debt or equity) that are publically traded, and the investment is not large enough to provide the investor with any significant influence, the accounting depends on its classification (HFT, AFS, HTM)
Trading Securities (Held for Trading HTF)
investments in equity instruments (stocks, options, rights warrants or debt instruments) investor has acquired with the intent to sell within a short period of time. Profit minded. Purchases primarily to gain short term profits from resale.
Available for Sale Securities (AFS)
all investments in marketable equity or debt instruments that do not fit the definition for HTM or trading. these may be classified as current or noncurrent depending upon the holding period (date of sale).
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. Noncurrent assets (unless maturity date is less than one year from the BS date)
Trading securities are recorded at __________ but then carried at ______ due to the fluctuations in market price. The acquisition and disposal of HTF investments are reported in ______on the statement of cash flows.
cost, FMV, operating activities
For trading securities, any unrealized gains or losses are reported on the ________ and realized gains or losses are reported on the _______.
IS (income from continuing operations), IS along with any dividend income or interest income
JE to purchase HFT
Dr. Investment in trading securities XX
Cr. Cash XX
JE for HFT if the FMV increased from 100 to 140
Dr. market adjustments HFT (BS) 40
(increases the CV of the trading security in the current asset section)
Cr. unrealized gain (IS) 40
(part of income from continuing operations)
JE for HFT if security FMV decreased from 140 to 90
Dr. unrealized loss (IS) 50
Cr. market adjustments HFT (BS) 50
Available for Sale Securities are initially recorded at _____but then carried at _____. The acquisition and disposal of AFS investments is an _______ on the CF statement.
cost, FMV, investing activity
Any unrealized G/L for AFS appear on the _______ and all realized G/L appear on the ______.
BS as a part of OCI in the SH Equity section, the cumulative amount is Accumulated OCI. IS
- JE to Purchase AFS 100 date of purchase
- JE AFS is now 140 X1
- JE AFS is now 90 X2
- Dr. Investment in AFS 100
Cr. Cash 100 - Dr. Market Adjustment- AFS (BS) 40
Cr. Unrealized Gain (BS) 40 - Dr. Unrealized Loss (BS) 50
Cr. Market Adjustments- AFS (BS) 50
*Market Adjustments account is a “Valuation” account.
When an AFS is sold, the difference between the cost and the proceeds is treated as a _____.
Realized Gain or Loss. Ignore the allowance account and adjust to the new target, unless it was the last investment, then the allowance and the unrealized G/L must be eliminated.
When and what type of security is subject to an impairment loss?
They are impaired when the decline in value is considered to be other than temporary, AFS investments are subject to impairment loss. HFT would not be since they are held at FMV and any unrealized g/l are already recognized in income. HTM would only be subject to impairment loss if the investor had reason to believe that the issuer of the debt would not make all principal and interest payments.
The impairment loss amount is calculated for AFS by?
the amount is the difference between the original cost and the declined value from which it is not expected to recover. It will be reclassified out of OCI on the BS and recognized as a loss in calculating NI on the IS.