ACCT Chapter 12
2 cash flows of a debt security
1. single repayment of the principal at maturity 2. the semiannual payment of interest
how are changes in trading securities fair value recorded?
1. the cost of the investment is recorded in an investment account on the balance sheet 2. changes in the fair value of the investment is recorded in a fair value adjustment account in the balance sheet
a debt security consists of
2 separate cash flows
significant influence usually is assumed to exist if the investor owns btw
20-50%
available for sale securities
All other debt and equity securities not classified in the others
held to maturity valuation
Amortized cost.
trading
Debt and equity securities bought and held primarily for sale in the near term to generate income on short-term price differences.
held to maturity
Debt securities that a company has the positive intent and ability to hold to maturity.
trading securities
Investments in debt and equity securities acquired principally for the purpose of selling them in the near term
CECL requires use of the
allowance method
available for sale securities
are not held for trading or designated as held to maturity investment is available for sale reported in balance sheet at fair value unrealized gains and losses are reported in statement of comprehensive income as OCI
debt securities
bonds and notes
trading securities are
carries at fair value on the balance sheet unrealized holding gains and losses are included in net income in the period in which fair value changes
consolidated financial statements
combine the individual elements of the parent and subsidiary statements into a single financial statement
equity securities
common stock and preferred stock
trading securities are classified in the investors balance sheet as a component of
current assets
with impairment losses are recognized
debit
significant influence means
decisions can be swayed in the direction the investor desires
objectives to debt and equity securities
earn interest or return from dividends realize gains from increases in the market prices of the securities to develop ongoing affiliations with the companies whose securities are acquired
HTM and AFS are shown in the balance sheet at
fair value
impairment
fair value declines below its recorded cost
financial statement presentation for trading securities
gains and losses are included in the income statement in the periods in which fair value changes regardless of whether they are realized or unrealized for the balance sheet they are recorded at fair value classified as current
debt securities are classified into 3 categories for accounting purposes
held to maturity trading available for sale
50-100%
investment valued on parents books under cost or equity method (consolidation)
20-50%
investment valued using equity method
ownership less than 20%
investment valued using the fair value
determine the present value of the 2 cash flows for determining the amount a debt security is sold for based on the
market price
equity investments do not have a
maturity
if the stated rate is more than the market rate the bond is sold at a
premium
fair value is not
recorded in the financial statements
debt security
represents a credit relationship with another company or governmental entity that typically pays interest for a fixed period
amortized cost
the acquisition cost adjusted for the amortization of discount or premium, if appropriate
purchasing life insurance on executives
to compensate the company for the untimely loss of a valuable human resource in the event the officer dies
for the fair value option for equity method investments
unrealized gains and losses are included in earnings
financial statement presentation of HTM
unrealized gains and losses are not recorded because because what is recorded is at amortized cost
types of debts securities
us govt municipal corporate bonds convertible debt commercial paper
cash surrender value
when the insured is still alive life insurance policy can be exchanged for a determinable amount of money
