Chapter 12 - Investments AC 311
What are the three types of debt investments
1. Held-to-maturity 2. Trading 3. Available-for-sale
The key characteristics of debt investments include
1. Purchasing the debt investment 2. Receiving interest every six months 3. Holding the bonds during periods in which the bond's FV changes (and thus incurring unrealized holding gains and losses, since the bonds have not been sold) 4. Either selling the bonds before maturity or receiving the principal payment at their maturity date
What two adjustments need to be made if United sells the trading bonds for 725k on Jan 5, 2022
1. Update the carrying value of the bonds to fair value and record in net income any unrealized holding gains and losses that occurred during 2022 up to the date of sale 2. On the date of sale, United needs to record the receipt of cash and remove the amounts associated with the investment from the relevant balance sheet accounts
What is the total loss over the life of the investment that United has recognized and when was it recognized
2021 loss recognized in NI: (50k) 2022 loss recognized in NI: (4k) Total: (54k)
If the buildings have a 10-year life and the diff in AD is 300 000, then United will need to recognize
30 000 of additional depreciation each year for the next 10 years
If the bonds have a stated rate of 12% on 700 000 face amount, then United receives
42000 every six months
Assume that United purchased 30% of Arjent Inc's common stock for 1.5 million cash on Jan 2, 2021. The fact that 30% of Arjent was purchased for 1.5 million implies that the full fair value price of Arjent is
5 million
While United will only receive 42000 (6%) from Masterwear in the first 6 months, it will effectively earn interest revenue of 7% on its investment because
666 633 * 7% = 46 664 (interest revenue)
OCI is closed to
AOCI at the end of each accounting period, and therefore accumulates in AOCI in the SE section of the BS OCI is to AOCI the same way that NI is to RE
How do we adjust the trading security to fair value for the first 5 days of Jan 22 if the fair value of the bonds has risen further to 725k, up from the 714 493 that we adjusted to at the end of '21? Give the amount needed in the fair value adjustment account and the journal entry
Amortized Cost: 671 297 Fair Value: 725 000 FVAB: 53 703 Fair value adjustment account: Beg bal on 12/31/21: 43 646 +/- adjustment needed to update: = Balance needed as of date of sale: 53 703 The adjustment is 10 057 AJE on Jan 5, 2022: Dr Fair Value Adjustment 10 057 Cr Gain on Investments (unrealized, NI) (to balance) 10 057
AFS securities appear on the SOCF as:
Cash flows from buying and selling AFS securities typically are classified as investing activities
How are HTM securities are shown on the Cash Flow Statement
Cash flows from buying and selling HTM securities typically are classified as investing activities
What are the column names for an amortization table for debt investments
Date Cash Interest: Stated Rate * Face Amount Interest Revenue: Market Rate * Outstanding Balance Amortization of Discount (difference between previous two columns) Amortized Cost (Face amount - discount)
If the FV had instead increased to 1.55 mill what would the entry have been
Debit FVA 50k Credit Gain on Investments (unrealized, NI) 50k
How do you record the sale of the investment using the FV to NI method on Jan 5, 2022
Debit cash 1 446 000 Debit Fair Value Adjustment 54 000 Credit Investment in equity securities 1.5 million
What is the entry to record the sale transaction for the AFS security
Debit cash 725 000 Debit discount on bond investment (acct bal) 28 703 Credit investment in bonds (acc bal) 700 000 Credit gain on investments (NI) (to balance) 53 703
What is the journal entry to record the recognition of investment revenue for the FV to Income method
Dec 31 Dr Cash 75K Cr Dividend Revenue 75k
The journal entry to record the interest received for the first six months as investment revenue is
Dr Cash (stated rate * face amount) 42000 Dr Discount on bond investment (difference) 4664 Cr Interest Revenue (market rate * outstanding balance) 46 664
How does United record the purchase if they had paid 725 000 to purchase Masterwear's 700 000 worth of bonds
Dr Investment in Bonds (face amount) 700 000 Dr premium on bond investment 25 000 Cr Cash 725 000
How does United record their payment of 666, 633 to purchase Masterwear's 700 000 worth of bonds
Dr investment in bonds (face amount) 700 000 Cr discount on bond investment 33 367 Cr Cash (price paid for the bonds)
United's entry for recording investment revenue under the quity method is
Dr investment in equity affiliate 150K Cr Inv Revenue 150K (30% * 500 000) (If a loss --> reduce investment in Arjent, loss on investment)
If an investor has significant influence over the operating and financial policies of the investee (typically between 20 and 50% of the voting stock), what reporting method is used by the investor
Equity method
When a security is reclassified between 2 reporting categories, it is transferred at its
FV on the date of transfer any unrealized holding g/l at reclassification is accounted for in diff ways
What are the FV through net income and Equity Method amounts of net income recognized
FV thru NI: Total of 21k of NI is recognized over the life of the investment, equal to 75K of dividend revenue minus 54k (50 000 + 4k) loss on the investment Equity: Total of 21k of net income over the life of the investment, equal to 150, of United's portion of Arjent's net income minus 30k depreciation adj and minus 99k loss realized on sale of investment Diff is when net income is recognized, not how much is recognized
Both the Fair Value Adj and AOCI accounts (after closing) now have balances of
FVA: 43 646 + 10 057 - 53 703 = 0 AOCI (after closing) 43 646 + 10 057 - 53 703 = 0
If United had not sold Arjent during 2022, how would it have adjusted its financials at Dec 31, 2022 if the account balances were: Cost: 1.5 million FV: 1.3 million FVAB: (200K)
Fair Value Adj Bal: 12/31/21: (50 000) +/- adj needed to update FV =12/31/22 bal: (200 000) Dec 31: dr loss on investments (unrealized, NI) 150k Credit Fair Value Adj 150k
How is process to record a sale similar and different in AFS vs. HTM?
Final entry is the same In both, there is no gain or loss recognized in net income over the life of the investment In AFS, the unrealized g/l is recognized in OCI whereas in HTM it is not recognized at all
What is the financial statement presentation for IS and statement of OCI for trading securities?
G/L are included in the IS in the periods in which fair value changes, regardless of whether realized or unrealized. Investments in trading securities do not affect other comprehensive income.
AFS securities appear in the Income Statement and OCI as
G/L are shown in OCI in the periods in which changes in FV occur. These amounts are reclassified out of OCI and recognized in net income in the periods in which the securities are sold
If an investor has the "positive intent and ability" to hold the securities to maturity, investments in debt securities are classified as
HTM (held-to-maturity)
Assume that as of Dec 31, '21 United has recorded the purchase of the bonds as well as receipt of the first semiannual interest payment, so the bonds have an amortized cost of 671 297, and the Fair Value is 714 943. The necessary fair value adj balance is 43 646. How is this recorded
Increase the FV Adjustment account from 0 (July 1, 21) to 43 646 (12 31, 21). Do this by debiting FV Adjustment
AFS securities appear on the Balance Sheet as:
Investments in AFS securities are reported at fair value. Unrealized holding g/l become part of AOCI in shareholders' equity, and are reclassified out of AOCI in the periods in which securities are sold
How are HTM securities shown on the Bal Sheet
Investments in HTM securities are reported at amortized cost, less any allowance for credit losses. FV of those investments are disclosed in the notes to financial statements
What is the financial statement presentation for BS for trading securities?
Investments in trading securities are reported at fair value as current assets
Due to unforeseen circumstances, the company decided to sell its debt investments that are HTM investments on Jan 5, 2022. What would be the journal entry on the date of the sale
Jan 5, 22: Dr Cash 725 000 Dr Discount on bond investment 28 703 Cr investment in bonds 700 000 Cr Gain on investments (NI) (to balance) 53 703 recorded same as any other realized gain
What is the journal entry for adjusting AFS investments to fair value (Jan 5 2022) when selling AFS Investments if the fair value has now risen to 725 000
Jan 5, 22: Amortized Cost: 671 297 Fair Value: 725 000 FVAB: 53 703 Balance of FVA As of 12/31/21: 43 646 +/- Adj = 10 057 Balance needed: 53 703 Jan 5: Dr FVA 10 057 Cr Gain on Investments (unrealized, OCI) 10 057
What is the entry for the purchase of the investments for the FV to Income method
July 1 Debit investment in equity securities 1.5 million Credit cash 1.5 million
Assume that United has the following portfolio of securities at the end of 2021: Miley Inc: Amort Cost: 800K FV: 875K Necessary FV Adj Bal: 75K Perry Corp: Amort Cost: 950K FV: 790K Necessary FV Adj Bal: (160)K 2021 Total Amort Cost: 1.75 mill; FV=1.665 mill; FVAB: (85) At the end of 2022: Miley Inc: Amort Cost: 600K FV: 575K Necessary FV Adj Bal: (25)K Perry Corp: Amort Cost: 450K FV: 325K Necessary FV Adj Bal: (125) Total Amort Cost: 1.05 mill; FV=900 mill; FVAB: (150) On Dec 31, 2022, what is the balance of the fair value adjustment needed and the AJE?
Need to go from a credit of 85k to a credit of 150k, requiring an additional 65k and recognition of a corresponding loss in net income AJE Dr Loss on investments (unrealized, NI) 65k Cr Fair Value Adjustment 65k
the balance of United's 30% investment in Arjent at Dec 31, 21 is reported as
Purch price: 1.5 million Share of net income: 150 000 Dividends: (75 000) Depreciation adj: (30 000) Investment in equity affiliate: 1 545 000
How are HTM securities shown on the Inc Statement and Statement of Compr Income
Realized gains and losses are shown in net income in the period in which securities are sold. Unrealized holding gains and losses are disclosed in the notes to financial statements. Investments in HTM securities do not affect OCI
Compare/contrast the entry on the last slide with what took place for the HTM securities
Same: record cash and remove all balance sheet accounts associated Both methods recognized a gain of 53 703 over the life of the securities Diff: FV account with Trading No gain or loss to recognize on date of sale for trading Trading recognizes unrealized holding g/l as they occur but HTM recognizes them upon sale
regardless of approach, the cash flows are the same and the same total amount of g/l is recognized in the income statement. In the previous example, that is
TS: 43 646 in 21 + 10 057 in 22 AFS and HTM: 53 703 in 22 amount does not change, only when the amounts are recognized in NI
United got an effective interest rate of 14% (which it could have gotten elsewhere in the market) from Masterwear because
United needed to pay only 666 633. Lowering investment cost raises the effective rate of return to 14%
The amount by which interest revenue exceeds interest received (in this case, 46 664 -42 000= 4 664 in the first 6 months) represents
a piece of the cost savings from purchasing the investment at a discount
(EM) consolidated financial statements report what two things
a. acquired company assets at FV on the date of acquisition rather than their book values on the investee's balance sheet b. Goodwill for the excess of the acquisition price over the FV of the identifiable net assets acquired
The discount on bond investment amount on the previous slide causes the
amortized cost of the investment (=700K - discount) to get larger by the same amount (from 666 633 to 671 297)
Each period United owns the Masterwear bonds, it will recognize
any unrealized holding gain or loss that is needed to move the FV adjustment to the value it needs to have at the end of the accounting period
(equity method) the purpose of adjusting the investment account and investment revenue when the investor's expenditure exceeds the book value of the assets acquired is to
approximate the effects of consolidation, w/o actually consolidating
When debt investments are purchased, they are recorded
at cost (total amount paid for the investment, including brokerage fees)
An investor has significant influence over the investee when it owns
at least 20% of the investee's voting shares
when we are not planning to trade the debt investment actively, but the investment is available to sell if, for example, cash needs arise or the market is particularly favorable falls in the middle of HTM and trading
available for sale securities
The book value of Arjent's net assets is only 2.1 million vs.FV of 5 million
bc the assets appreciated in value (buildings, land) and goodwill
(EM) Why does it matter if we report assets at fair values for consolidated statements
can result in higher expenses in the future
Regardless of approach, the same ___ _____ occurs, and the same total amount of net income is recognized over the life of the investment
cash flows
What is the financial statement presentation for cash flow statement for trading securities?
cash flows from buying and selling trading securities typically are classified as operating activities, bc the financial institutions that routinely hold trading securities consider them as part of their normal operations
Why does it make sense to record trading securities at fair value
changes in FV provide an indication of management's success in deciding when to acquire the investment, when to sell it, whether to invest in fixed income or variable rate securities, and long or short term
a debt security cannot be classified as HTM if the investor might sell it before maturity in response to
changes in market prices or interest rates, to meet the investor's liquidity needs, or similar factors
Both companies continue to operate as separate legal entities, and the subsidiary reports separate financial statements, but bc of the controlling interest, the parent company reports
consolidated financial statements which treat the parent and subsidiary as if they are one company
If an investor has significant influence over the operating and financial policies of the investee (typically more than 50% of voting stock), what reporting method is used by the investor
consolidation
Similarly to HTM investments, trading securities are recorded at
cost when they purchased discount or premium is amortized to interest revenue over time as periodic interest payments are received
The two ways to calculate FV of bonds are to use
current market price or calc PV using current market rate
The adjusting journal entry on Dec 31, 21 is
debit FV Adj 43 646 Cr gain on investments (unrealized NI) 43 646
The purchase of 30% of Arjent with the equity method is recorded with
debit investment in equity affiliate 1.5 million credit cash 1.5 million
What is the journal entry for reversing previous FVAs on Jan 5, 2022?
debit reclassification adjustment (OCI) 53 703 credit FVA 53 703
if the investee reports a net loss, then the investment account is
decreased by the investor's share of the investee's net loss (adj for additional expense)
When the investee pays out assets (dividends) under the equity method, the investor's share of the remaining assets
decreases
The differences in how dividends are recorded results in
different carrying values for the investment at the time the investment is sold, and therefore result in different realized /l when the investment is sold
if the investor's share of investee losses exceeds the carrying amount of the investment, then the investor should
discontinue applying the equity method until the investor's share of investee earnings equals losses not recognized during the time the equity method was discontinued (do not reduce investment account below zero)
Market rate > stated rate
discount
What assets do/don't have higher depreciation expense during their remaining useful lives if reported at FV
do: buildings, equipment, other depreciable assets do not: land, goodwill
when significant influence exists but the investor does not have effective control, the investment should be accounted for by the
equity method
If FV is less than the amortized cost (FVAB has a credit balance), and management does not intend to sell the investment and does not believe it is more likely than not that it will have to sell the investment before it recovers, management is required to
estimate and recognize credit losses and reduce the carrying value of the AFS investment with an allowance for credit losses (same as HTM). Any remaining impairment is accounted for normally as an unrealized holding loss in OCI
AFS securities are reported in the balance sheet at
fair value
When Arjent determines its net income, it will do so based on DE from book value of its buildings on the balance sheet. United will have to depreciate its share of the _____ _____ of the buildings at the time it made its investment
fair value
If United paid 1.5 million for 30% of the identifiable net assets that, sold separately, have a FV of 1.08 million, the 420K difference between price paid and FV of United's share in Arjent's net assets is
goodwill
Suppose that on Dec 31, 2021, the market interest rate for securities similar to the Masterwear bonds has fallen to 11%. the present value of the bonds using a lower discount rate results in _____
higher present value
(EM): If the recorded amt of inventory is increased, COGS will be
higher when the inventory is sold/EM attempts to mimic the negative effect on net income
The holding period for trading securities is measured in
hours and days rather than months or years typically reported among current assets usually only banks and other financial institutions
To record the purchase of an investment and the receipt of interest revenue, we use
identical entries for all three approaches
If the new fair value on Dec 31, 2021 is 714 943, and the same bonds have an amortized cost of 671 297, the difference is an unrealized gain of 43 646. How will this increase in the fair value of its debt investment be accounted for if United views as HTM investments?
ignored
In order to not include unrealized holding gains and losses in income each period and therefore make income appear volatile, show unrealized gains and losses of AFS securities in OCI as they occur and then only include realized g/l in net income
in the period in which an investment is actually sold
If transferring from Trading to either HTM or AFS, then
include in current net income any unrealized g/l that occurred in the current period prior to the transfer. Unrealized gains and losses that occurred in prior periods already were included in net income in those periods
If transferring from either HTM or ATS to Trading, then
include in current net income the total unrealized g/l, as if it all occurred in the current period
Rather than decreasing or increasing the investment account itself, use a valuation allowance, fair value adjustment, to
incr or decr the carrying value of the investment
The amortization of discount does what every period
increases from previous period bc effective interest has increased bc OB is larger
Other current equity investments, and long-term equity investments, are classified as
investing activities in the SOCF
the purchase and sale of the investment is in the
investing activities section
What will the HTM investment be recorded as after this change in FV?
investment is shown in the balance sheet at amortized cost of 671 297 United will disclose the fair value of its HTM investments in a disclosure note but no FV changes in income statement or balance sheet
To account for the higher amount of DE, United reduces
investment revenue as if Arjent had included the expense in its earnings
(Equity method) This is referred to as amortizing the differential because
it mimics the process of expensing some of the difference between the price paid for the investment and the book value of the investment
The consolidated financials include an
item-by-item combination of the two statements (ie parent has 8 mill in cash and subsidiary has 3 in cash, the consolidated sheet has 11 million)
If the book value of Argent's buildings is 1 million and the fair value is 2 million, there is a difference of 1 million. United will recognize
its 30% share of additional DE, totaling 300k over the rem life of the buildings
After the previous entry, the investment is carried at
its FV as of the date it is being sold all g/l has already been included in net income and thus does not need to be recognized at date of sale
No adjustments for increased DE for
land/goodwill
If an investment is acquired in mid-year, then multiply all necessary accounts (ie share of net income, depreciation adjustment, dividends) by
months remaining in the year/12
On July 1, 2021, Masterwear Industries issuerd 700K of 12% bonds, dated July 1. Interest of 42K is payable semiannually on June 30 and Dec 31. The bonds mature in three years, on June 30, 2024. United Intergroup, Inc. purchased the entire bond issue on a date when the market interest rate for bonds of similar risk and maturity was 14%. How do you find the present value of the bonds
n=6 i/y = 7 PMT = -42000 (700k * .06) FV = -700000
Comprehensive income includes
net income and all other changes in equity that do not arise from transactions with owners
What differs between recording changes in FV for TS and AFS securities is whether unrealized g/s is recognized in
net income and then in RE (TS) or recognized in OCI and then in AOCI (AFS) No FV adj for HTM securities
At the same time that the fair value adjustment is recorded, also record an unrealized holding gain or loss that is included in
net income in the period in which the fair value changes
For Hold to Maturity Reporting Approach, Unrealized Holding Gains and Losses are _________ and are carried in the balance sheet at _______
not recognized amortized cost
the receipt of dividends is reported as an inflow of cash in the
operating activities section
The investment account at the end of the reporting period when using the equity method is reported at
original cost, increased by investor share of the investee's net income (adj for additional expenses such as depreciation), and decreased by dividends
Unrealized holdings gains and losses are less important if sale before maturity isn't an alternative, bc those gains and losses will never be
realized by sale
at each reporting date, the appropriateness of the classification of a debt investment is
reassessed
if an equity method investment FV has declined to an amt. below its current carrying value, and the decline is not temporary, the investor should
recognize an impairment loss in net income and reduce the carrying value of the investment to FV in the balance sheet
For Trading Securities Reporting Approach, Unrealized Holding Gains and Losses are ________ and are carried in the balance sheet at _______
recognized in net income, and therefore in retained earnings as part of shareholders' equity Fair Value
If, instead, Arjent's inventory, not buildings, has a fair value that exceeds book value by 1 million, and that inventory was sold by Arjent in the year following United's investment, United would
reduce investment revenue by its 30% share of the difference (30 000) in the year following the investment
companies account for the estimated amount of bad debts on an HTM investment by
reducing the carrying value of the HTM investment with an allowance for credit losses, just like recognizing BDE and an allowance for uncoll accts for AR
After this previous journal entry is recorded, all of the unrealized gains associated with the investment have been
removed from AOCI as though no unrealized gains and losses ever happened this avoids double counting the unrealized gains/losses in both OCI and SE
trading securities carrying value must be adjusted to fair value by the end of every
reporting period
Since United has been recording changes in fair value over the life of the investment, when it sells the investment, those fair value changes must be _____ by _____
reversed debit a reclassification adjustment to OCI for the unrealized gains and eliminate the FVA
if the market rate of interest falls after a bond is purchased, the market will compute the PV of the cash flows provided by the bond using that lower rate, so the fair value of the bond _____ and the person holding the bond suffers an _______
rises unrealized holding gain FV has increased but loss has not been realized bc the investment has not been sold
For Fair Value vs. Equity Method, how do they both record a purchase of an investment
same basic entry
The rationale for the equity method is that as the investee earns additional net assets (income), the investor's
share of those net assets increases
If FV is less than the amortized cost (FVAB has a credit balance), and management intends to sell the investment or believes it is more likely than not that it will have to sell it before fair value recovers, then
the AFS investment is written down to FV and the impairment loss is recognized in net income
The second and third entries for AFS securities are called reclassification bc
the amounts included in OCI are removed and instead get recognized in net income at the time of the sale (reclassify unrealized g/l from OCI to g/l on NI)
When the prevailing market rate changes, this will cause
the fair value of the bonds to change with changes in the market rate bc market participants will use the prevailing rate to compute the PV of the cash flows provided by the bond
the consolidation reporting method includes
the financial statements of the investor and investee are combined as if they are a single company
To record changes in fair value, the entries for TS and AFS securities have the same effect on _______ and _______.
the investment (via FV adjust allowance) and the same eventual effect on SE
The equity method includes
the investment is reported at cost adjusted for investor's share of subsequent earnings and dividends of the investee
What two events are accounted for the same regardless of how the debt investment is classified
the purchase of a bond and the receipt of interest payments
The piece of the discount that is captured during each investment payment increases United's investment return from
the rate the bond (12%) pays to the higher rate (14%)
an equity method investor needs to make adjustments anytime
there are revenues or expenses associated with an asset or liability that had a difference between book value and fair value at the time the investment was made
Investments in debt acquired principally for the purposes of selling them in the near term are classified as
trading securities
United will incur _____ as a result of holding the bond during periods in which its fair value changes
unrealized gains and losses
Same as Trading, The fair value adjustment for AFS is adjusted up or down each period and a corresponding
unrealized holding gain or loss reported in OCI
OCI closes to AOCI (holding tank in SE on balance sheet) and unrealized holding gains in some years offset
unrealized losses in other years
Unrealized holding gains and losses are treated differently depending on the type of investment bc
various parts of the investment are more relevant than others depending on the holding strategy
Fair value and equity method differ in
whether investment revenue is recorded when dividends are received or whether we recognize unrealized holding g/l associated with change in FV of the instrument
What are the 4 critical events over the life of an investment in the equity of another company
1. Purchasing the equity security 2. Receiving dividends (for some equity securities) 3. Holding the investment during periods 4. Selling the investment (and thus incurring realized gains and losses, since the security has been sold and the gains or losses actually incurred)
What are the two differences between trading securities and HTM investments
1. Trading securities are written up or down to their fair value (vs. HTM which are kept at amortized cost) 2. Corresponding unrealized holding gains and losses on trading securities are included in net income in the income statement (HTM do not include unrealized holding gains and losses in net income)
if United sells the Arjent stock for 1.446 mill on Jan 5, 2022, what two types of JE must United make under the FV to NI method
1. United first records in net income any unrealized holding gains and losses that occurred during '22 prior to the date of sale 2. On the date of sale, record the receipt of cash and remove the accounts associated with the investment from the relevant balance sheet accounts
On Jan 5, 22, the cost of Arjent was 1.5 million and the fair value was 1.446 million, and the necessary FVA bal is (54k) Fair Value Adj Balance: Beg balance on 1/1: (50k) +/- adj needed to update FV = Bal needed as of date of sale: (54k) What is the adj amount and JE
Decrease in 4000 Debit loss on investments (unrealized, NI) 4000 Credit fair value adjustment 4000
What is the entry to record the sale of the trading security on Jan 5, 2022 (ignore interest) for 725k
Dr Cash 725 000 Dr Disc on Bond Investment 28 703 Cr Investment in Bonds 700k Cr Fair Value Adjustment 53 703
What is the journal entry for receiving dividends in the equity method
Dr Cash 75000 Cr Investment in equity affiliate (30%. * 250k) 75 000
What is the yearly journal entry to adjust for the additional DE
Dr Investment Revenue 30k Cr Investment in equity affiliate (30% * (2 mill - 1 mill) / 10 years) 30 000
On Dec 31, the cost of the investment is 1.5 million, and the FV is 1.45 million. How is this accounted for using the FV to Income method
Fair Value Adjustment Account Beg balance: 0 +/- Adj needed to update FV = Bal on 12/31/21: (50 000) Need to decrease FVAB by 50K Debit loss on investments (unrealized, NI) 50k Credit Fair Value Adjustment 50k
Reporting method used when the investor does not have significant influence over the operating and financial policies of the investee (typically less than 20% of voting stock)
Fair value through net income
For Available-for-sale (AFS), Unrealized Holding Gains and Losses are __________ and are carried in the balance sheet at _________
Recognized in other comprehensive income, and therefore in accumulated OCI in shareholders' equity Fair Value
Assume at Dec 31, '21, United has recorded purchase of bonds on July 1 and the receipt of the first interest payment, and the bonds have an amortized cost of 671 297. The FV of the bonds on Dec 31 is 714, 943. How do we adjust this
The FVAB need to be increased from a balance of 0 on the purchase date to a debit balance of 43 646 (on Dec 31) Dr Fair value adjustment 43 646 Cr Gain on Investments (unrealized, OCI) 43 646
After the previous entry has been made, the investment is carried on the balance sheet at _____ and all unrealized gains and losses with the investment have been included in _____
fair value OCI
When you are an investor who owns less than 20% of the voting shares of an investee, the equity investments are carried at ____ on the BS, with unrealized holding g/l recognized in ______ in whatever period they occur This is the same as the _____ method for reporting debt investments
fair value net income trading securities
if the market rate of interest rises after a bond is purchased, the market will compute the PV of the cash flows provided by the bond using that higher rate, so the fair value of the bond _____ and the person holding the bond suffers an _______
falls unrealized holding loss FV has decreased but loss has not been realized bc the investment has not been sold
under the equity method, the investment is initially recorded at cost, and after that, the investment balance is
increased by the investor's % share of the investee's net income (or decreased by its share of a loss) Decreased by the investor's % share of the investee's dividends paid Potentially adjusted for other items
Since each share of common stock gets a vote on key decisions made by the company, if an equity investor owns enough shares, the investor has enough votes to
influence the operations of the company whose shares it owns
(equity method) both the investment account and investment revenue are adjusted for differences between
net income reported by the investee and what the amt. would have been if consolidation procedures had been followed
If transferring from AFS to HTM, then
no current income effect. Do not write off any existing unrealized holding g/l in AOCI, but amortize it to net income over the remaining life of the security (FV amt becomes the security's amortized cost basis)
If transferring from HTM to AFS, then
no current income effect. Report total unrealized gain or loss as a separate component of SE
Unlike trading securities, unrealized gains and losses on AFS securities are
not included in net income instead included on OCI
Equity investments in which the investor does not have significant influence and are held with an intent for short-term profit are normally treated as
operating activities in the statement of cash flows, similar to debt investments that are classified as trading securities
If a company acquires more than 50% of the voting stock of another company, it is said to have control, and the investor is called the _____, and the investee is called the ______
parent; subsidiary
Market rate < stated rate
premium
What does the fair value through net income method look like
similar to the trading securities approach used for debt; investment reported at FV (with unrealized holding gains and losses included in net income), unless FV is not readily determinable
