ACCT. Chapter 13

A company reports its investments in trading securities at ______________ on the balance sheet.

Fair value

The transfer of a security between investment categories is accounted for at ____________________ at the time of the transfer.

Fair value

What is it called when the investor controls the investee through an investment in equity securities?

Consolidation

What are held to maturity investments initially recorded as?

Cost

________ represents a creditor relationship with another company.

Debt security

Using the equity method, how do you find the investor's share of the investee's income?

(Investee's net income) x (% ownership) - adjustments

What disclosures should be made for available for sale securities on each balance sheet date?

1. Aggregate fair value. 2. Gross unrealized holding gains and losses. 3. Amortized cost.

What disclosures should be made for held to maturity securities on each balance sheet date?

1. Aggregate fair value. 2. Gross unrecognized holding gains and losses. 3. Amortized cost. 4. The related realized or unrealized gain or loss and the circumstances leading to the decision to sell or transfer the security.

What disclosures should be made for trading securities?

1. Aggregate fair value. 2. Change in the net unrealized holding gain or loss that in included in each income statement.

What are the 4 examples of investments in equity securities?

1. Common Stock 2. Preferred stock 3. Stock option, rights, and warrants 4. Put and call options

What are the steps for evaluating for impairment?

1. Determine if the investment is impaired. 2. Evaluate whether the impairment is other than temporary. 3. If the impairment is other than temporary, recognize a loss equal to the difference between the cost of the investment and its fair value.

What are the 3 categories for a company to classify a passive investment as at acquisition?

1. Held-to-maturity securities 2. Trading securities 3. Available-for-sale securities

What disclosures should be made for available for sale securities for each income statement period?

1. Proceeds from sales and the gross realized gains and losses on those sales. 2. Basis on which cost was determined (e.g., average cost method.) 3. Gross gains and gross losses included in net income from transfers of securities from this category into trading category. 4. Change in the net unrealized holding gain or loss included as a separate component of other comprehensive income.

What are the two guiding principles for the preparation of consolidated financial statements?

1. The entity cannot make a profit by selling to itself...that is, intercompany sales and profits must be eliminated from the consolidated financial statements. 2. The entity cannot own or owe itself...that is, intercompany receivables and payables must be eliminated from the consolidated financial statements.

What are the 5 examples of investments in debt securities?

1. U.S. treasury securities. 2. Municipal and corporate bonds. 3. Convertible debt. 4. Commercial paper. 5. Preferred stock that has certain debt-like features

Generally, an investment is considered passive when a company owns less than ______ percent of the voting common stock of the investee.

20

Significant influence generally occurs when the investor owns between _______ and _______ percent of the voting common stock of the investee.

20; 50

What are trading securities?

All equity securities and investments in debt securities that are purchased and held principally to sell in the near term.

If the investment allows the company to significantly influence the investee's decisions, the company will use the _________ method.

Equity

_______ represents an ownership interest in another company.

Equity security

The ___________ method of accounting is used to account for investments in which significant influence exists.

Equity.

When is a security's impairment considered "other than temporary"?

If the company: a.) has decided to sell the security. b.) considers it more likely than not that it will be required to sell the security before the recovery of its amortized cost basis.

Cash flows from purchases, sales, and maturities of available for sale securities and held to maturity securities are classified as cash flows from __________________.

Investing activities.

Using the Equity method, how does an investor find the value of his investment to report?

Investment = Acquisition cost + Investor's share of investee income - dividends

What's another name for marketable securities?

Investment securities

What kind of investment is it when the investor controls the investee?

Majority active investment

What's it called when a company has 20-50% of the voting common stock of an investee?

Minority active investments (equity method investments)

What is it considered when a company's investment is not sufficiently large enough to allow it to control or exert significant influence over the other company?

Minority passive investment

Where are unrealized holding gains and losses resulting from changes in the fair value of trading securities reported?

Net income for each period

Where are interest and dividend income, as well as realized gains and losses on sales reported for trading securities?

Net income for each period.

How is interest income handled with held to maturity investments?

Recognized in net income as it is earned

How do you account for any related unrealized gain or loss when you are transferring a held to maturity into an available for sale security?

The difference between the held to maturity security's amortized cost and the fair value at the time of transfer gives rise to an unrealized holding gain or loss which is included in other comprehensive income.

How do you account for any related unrealized gain or loss when you are transferring any other category into a trading category?

The previous unrealized holding gain or loss is recognized immediately in net income and eliminated from accumulated other comprehensive income.

How do you account for any related unrealized gain or loss when you are transferring an available for sale security into a held to maturity?

The unrealized holding gain or loss on the date of transfer will continue to be reported as a separate component of accumulated other comprehensive income and also represents a premium or a discount that is amortized over the remaining life.

How are unrealized holding gains and losses handled for held to maturity investments?

They are NOT recognized on the balance sheet or income statement, but are disclosed in the notes to the financial statements

All equity securities with determinable fair values must be categorized as __________ securities and reported at fair value.

Trading

What is the only category an investment in equity can be classified as?

Trading

An increase in the fair value of investment securities is an _________________________ while a decrease in the fair value of investment securities is an ______________________________.

Unrealized holding gain; unrealized holding loss

What are held to maturity securities?

When a company has the positive intent and ability to hold until maturity, which is not the same as the absence of an intent to sell.

When is an investment considered impaired?

When its fair value is less than its cost.

How do you account for any related unrealized gain or loss when you are transferring from the trading category into any other category?

You don't have to account for the unrealized holding gain or loss because it has already been recognized in net income.

What are unrealized holding gains and losses resulting from changes in the fair value of the securities reported as for Available for sale securities?

a component of other comprehensive income.

A debit balance in the allowance for change in the fair value of investments represents a fair value __________ the amortized cost of the investment. (an unrealized holding _________)

above; gain

How do companies report their held-to-maturity securities?

amortized cost

What are held to maturity investments subsequently reported at?

amortized cost on the ending balance sheet

A credit balance in the allowance for change in the fair value of investments represents a fair value ___________ the amortized cost of the investment (an unrealized holding).

below; loss

What are available for sale securities?

debt securities that are not classified as held to maturity or trading.

A credit balance in the unrealized holding gain/loss account represents a net unrealized _________.

gain

A debit balance in the unrealized holding gain/loss account represents a net unrealized __________.

loss

For available for sale securities, a company reports the realized gains and losses in ___________, but reports the unrealized gains and losses in _____________.

net income; other comprehensive income

What are and changes in fair value reported as for an investment classified as an available for sale security?

other comprehensive income