Section 2...Investments

Question 1

Equity investments with significant influence (Equity Method)

Answer 1

20-50%

Each year, investee records their share of company’s P&L by
Dr Investment
Cr Income from Investment
UNLESS…the F.V. option is applied. If so, the ONLY adjustment is the F.V. adjustment, i.e. no adjustment for %Income and Dividends.

Cash dividends rec’d: Carrying amount of investment is DECREASED by dividends rec’d.

If there’s a useful life and F.V. of purchase is higher than carrying value, it needs to be amortized over the useful life and reduces N.I. of investee.
J.E. is to take ownership share of N.I. (minus) the amount of Goodwill x’s ownership share / useful life

Question 2

Equity Investment without significant influence (F.V. or Cost method)

Answer 2

HAS determinable F.V.
-recorded at cost of acq.
-when financials are prepared, valued at F.V. at Balance Sheet date
-unrealized gain/loss reported on I.S.
-When sold, the REALIZED gain/loss is based on Sales Price and ORIGINAL ACQ price.

NO determinable F.V.
-recorded at cost and assessed for impairment
-need to record the adj to F.V. at B.S. date by Dr. F.V. adj and Cr. Unrealized Gain

Dividends
No j.e. for stock dividends
Liquidating dividend: reduces the investment-
Dr. Cash and Cr. Investment.

Question 3

Debt investments

Answer 3

Held to maturity:
-carried at amortized cost
-unrealized gains/losses are not recorded
-interest, impairment, and REALIZED gains/losses goes on IS

AFS:
-accounted for at F.V.
-adjust to F.V. each period
-unrealized gains/losses goes on B.S. as part of OCI UNLESS you use the F.V. option, then it goes on the I.S.
-interest and REALIZED gains/losses goes on IS
-If Land or any attachments to land is held as AFS, NO depreciation, NEED TO report at F.V., and it is NOT classified as PP&E

Trading:
Same as ASF except for Unrealized Gains/Losses goes on IS.

REALIZED losses are based on ACQ PRICE