Chapter 17 ACC302

trading securities --> available for sale -->

- INCOME - EQUITY

investments

- buy the debt of other corporations - buy the bonds of other corporations - and you have to disclose your intent -- why are you buying them?

unrealized holding gain or loss

- held to maturity; not recognized because they will be held long-term - trading securities; buying and selling them today so it's in net income - available for sale; recognized as other comprehensive income and separate stockholder's equity section

what is your intent in buying debt/bonds?

- held to maturity; your intent is long-term - trading securities; your intent is to trade and try to make money - available for sale; your intent is to invest your money and sell them

2 ways of valuing

1. @ fair value 2. @ amortized cost (AKA book value or carrying value)

8% bonds purchased to yield 10% which is coupon and which is market rate?

8% is coupon rate 10% is market rate

if market rate > coupon rate

DISCOUNT

loss on sale entry

DR Cash DR Loss on sale of investments CR Debt investments

adjusting entry for trading securities

DR Fair value adjustment CR Unrealized holding gain or loss - Income

An investor has a long-term investment in stocks. Regular cash dividends received by the investor are recorded as Fair Value Method Equity Method

Fair Value: income Equity: a reduction of the investment

Santo Corporation declares and distributes a cash dividend that is a result of current earnings. How will the receipt of those dividends affect the investment account of the investor under each of the following accounting methods? Fair Value Method Equity Method

Fair Value: no effect Equity: decrease

if market rate < coupon rate

PREMIUM

Judd, Inc., owns 35% of Cosby Corporation. During the calendar year 2021, Cosby had net earnings of $300,000 and paid dividends of $30,000. Judd mistakenly recorded these transactions using the fair value method rather than the equity method of accounting. What effect would this have on the investment account, net income, and retained earnings, respectively? a. Understate, understate, understate b. Overstate, overstate, overstate c. Understate, overstate, overstate d. Overstate, understate, understate

a. understate, understate, understate

"carrying amount of bonds" =

amortized cost - if carrying amount increases, it is a discount - if carrying amount decreases, it is a premium

for a loss on the sale of available for sale securities:

amortized cost > selling cost Amortized cost less: Selling price of bonds = Loss on the sale of bonds

Watt Company purchased $300,000 of bonds for $315,000. If Watt intends to hold the securities to maturity, the entry to record the investment includes a. a debit to Debt Investments at $300,000. b. a credit to Premium on Debt Investments of $15,000. c. a debit to Debt Investments at $315,000. d. none of these choices are correct.

c. a debit to Debt Investments at 315,000

An available-for-sale debt security is purchased at a discount. The entry to record the amortization of the discount includes a a. debit to Interest Revenue. b. none of these answers are correct. c. debit to Debt Investments. d. debit to the discount account.

c. debit to Debt Investments

Which of the following is not generally correct about recording a sale of a debt security before maturity date? a. A gain or loss on the sale is reported as an other revenue or expense. b. An entry must be made to amortize a discount to the date of sale. c. The entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments. d. Accrued interest will be received by the seller even though it is not an interest payment date.

c. the entry to amortize a premium to the date of sale includes a credit to the Premium on Debt Investments

Which of the following is correct about the effective-interest method of amortization? a. The effective-interest method applied to investments in debt securities is different from that applied to bonds payable. b. Amortization of a premium decreases from period to period. c. Amortization of a discount decreases from period to period. d. It must be used to amortize a discount or premium unless some other method yields a similar result.

d. it must be used to amortize discount or premium unless some other method yields a similar result

When a company holds between 20% and 50% of the outstanding stock of an investee, which of the following statements applies? a. The investor should always use the fair value method to account for its investment. b. The investor should always use the equity method to account for its investment. c. The investor must use the fair value method unless it can clearly demonstrate the ability to exercise "significant influence" over the investee. d. The investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee.

d. the investor should use the equity method to account for its investment unless circumstances indicate that it is unable to exercise "significant influence" over the investee

straight-line method

everything stays the same in the schedule all the way down

trading securities are valued at

fair value

50-100% of ownership

full control ; Consolidation method

trading securities are recognized

in net income

available for sale are recognized

in stockholder's equity

0% of ownership

little or no significance ; Fair Value method

comprehensive income formula

net income + other comprehensive income

held to maturity are _____

not recognized

effective interest method

only the Cash Received stays the same

20-50% of ownership

significant ; Equity method

if you don't have significance ...

use the Fair Value Method