ACCO EXAM 2: Ch.17- Investments

Types of Debt investments:

-U.S. Government Securities -Municipal securities -Corporate bonds -Convertible Debt

Significant Influence interest (Holdings between 20-50%)

-Valuation: Equity Method -B/S Reporting: -Unrealized Holding G/L: NOT RECOGNIZED (NO FV ADJUSTMENT ENTRY) -Other Income Effects:; proportionate share of investee's income. -Investment should lead to a presumption that in the absence of evidence to the contrary, and investor has the ability to exercise significant influence over a investee. -(B/S Reporting)Record the investment at cost and subsequently adjust the amount each period (On the B/S) for: 1.The investor's proportionate share of the earnings (losses) and 2. Dividends received by the investor.

Passive Interest (holdings of less than 20%):

-Valuation: Fair Value -B/S Reporting: Current or noncurrent assets -Unrealized Holding Gains or Losses: Recognized in Net Income -Other Income Effects: Dividends declared are considered dividend revenue; gains and losses from sale. -NO ENTRY when the company reports annual NI/NL. -FV ADJUSTMENT entry at yr end

Trading Securities (held for less than 3 months)

-Valuation: Fair Value (through Net Income) -B/S Reporting: Current Assets -Unrealized holding gain/loss: Recognized in Net Income! -Other Income Effects: Interest when earned; gains and losses from sale. -Any discount or premium is amortized. -A Holding Gain/Loss is the net change in the fair value of a security from one period to another, exclusive of dividend or interest revenue recognized but not received.

Available-for-sale securities

-Valuation: Fair Value (through Other Comprehensive Income) -B/S Reporting: Current or noncurrent assets -Unrealized holding gain/loss: Recognized as other comprehensive income and as separate component of stockholder's equity. -Other income effects: Interest when earned; gains and losses from sale. -Any discount or premium is Amortized.

Investments in Equity Securities: Ownership percentages

0-20% = Investor has passive interest 20-50% = Investor has significant influence. 50-100% = Investor has controlling interest

Companies account for investments based on

1. The type of security (debt or equity), and 2. Their intent with respect to the investment.

Different motivations for investing

1. To earn a high rate of return 2. To secure certain operating or financing arrangements with another company.

For that assets the following Impairment model is used: Impairment measured as the difference between the lower of amortized cost or fair value?

An impairment is measured as the difference between the lower of amortized cost or fair value for debt securities measured at fair value with gains and losses recorded in net income.

Investment Classifications: Bonds that will mature in 5 years are purchased. The company would like to hold them until they mature, but money has been tight recently and they may need to be sold.

Available-For-Sale Securities

Held-To-Maturity Securities

Debt security must have both to be classified as HTM: 1. The positive intent, and 2. The ability to hold securities to maturity. -Valuation: Amortized Cost -B/S Reporting: Current or noncurrent assets -Unrealized holding gain/loss: NOT RECOGNIZED -Other income effects: Interest when earned: gains and losses from sale.

Debt securities that are bought and held primarily for sale in the near term are reported at:

Fair Value -Debt securities that are bought and held primarily for sale in the near term are classified as trading securities and are reported at fair value.

True or False: Unrealized gains and losses on held-to-maturity securities are reported on the income statement.

False because Unrealized gains and losses are not recorded on held-to-maturity securities.

True/False: Investments are reported at market value on the balance sheet under the equity method.

False: -Investments reported under the equity method are carried at cost, and periodically adjusted by the investor's share of the investee's earnings or losses, and decreased by all dividends received from the investee.

Investment Classifications: A bond that matures in 10 years was purchased. The company has committed the money for an expansion project planned 10 years from now.

Held-To-Maturity Securities.

Sale of Debt Securities:

If company sells bond before maturity date: -It must make entries to remove from the Debt Investments account the amortized cost of the bonds sold. -Any realized gain or loss on sale is reported in the "Other" section of the income statement.

Investment Classifications: 10% of the outstanding stock of Farm-Co was purchased. The company is planning on eventually getting a total of 30% of its outstanding stock.

None of the Above

Investment Classifications: Preferred stock was purchased for its constant dividend. The company is planning to hold the preferred stock for a long time.

None of the Above

What do Debt Securities represent

Represent a creditor relationship.

Investments in Equity Securities

Represent ownership of capital stock Cost Includes: 1. Price of the security, plus 2. Broker's commission and fees related to the purchase. -The degree to which one corporation (investor) acquires an interest in the C/S of another corp (Investee) generally determines the accounting treatment for the investment subsequent to acquisition.

the impact on stockholders' equity of a transfer from available-for-sale to trading:

The impact on stockholders' equity of a transfer from available-for-sale to trading that the unrealized gain or loss at the date of transfer increases or decreases stockholders' equity.

Investment Classifications: A bond that will mature in 4 years was bought 1 month ago when the price dropped. As soon as the value increases, which is expected next month, it will be sold.

Trading Debt Securities

Investment Classifications: Bonds were purchased in December of this year. The bonds are expected to be sold in January of next year.

Trading Debt Securities

Unrealized holding gains or losses which are recognized in income are from debt securities classified as

Trading Securities

Trading securities are generally held for less than:

Trading securities are temporary investments held for less than 3 months.

True/False: Holdings between 20% and 50% of another company's voting stock are accounted for using the equity method.

True: Investments of this size (holdings between 20% and 50% of another company's voting stock. are considered to result in a significant influence over the investee company, so the equity method is used.

True/False: Recovery of impairment is prohibited by US GAAP for held-to-maturity securities.

True: Recovery of impairment is prohibited for held-to-maturity securities.

The unrealized holding gain or loss on trading securities is reported as:

Unrealized holding gains (losses) on trading securities are reported as part of net income.

Controlling Interest (Holdings of more than 50%)

Valuation method: Consolidation method -Unrealized Holding Gains/Losses: NOT RECOGNIZED (NO FAIR VALUE ADJUSTMENT ENTRY) -Other Income Effects: Not Applicable, Parent and subsidiary company income and loss combined. -INVESTOR corp. is referred to as the PARENT -INVESTEE corp. is referred to as the SUBSIDIARY -Investment in the SUBSIDIARY is reported on the PARENT'S B/S as a long-term investment. -PARENT generally prepares CONSOLIDATED FINANCIAL STATEMENTS.

Holdings of Less than 20% (Passive Interest) - Accounting Subsequent to Acquisition: WITHOUT READILY DETERMINABLE FAIR VALUE

Value and report the investment using a practicability exception. -Entities report equity investments at cost adjusted for changes in observable prices minus impairment. -Entities recognize dividends when received and generally recognize gains or losses when selling the securities.

Holdings of Less than 20% (Passive Interest) - Accounting Subsequent to Acquisition: WITH READILY DETERMINABLE FAIR VALUE

Value and report the investment using the fair value method.

Unrealized holding gains or losses are recognized as other comprehensive income for:

available-for-sale securities.

Investments in debt securities should be recorded on the date of acquisition at

cost plus brokerage fees and other costs incidental to the purchase.

Under the equity method, the investment account is decreased by all of the following except the investor's proportionate share of:

declines in the fair value of the investment. -Dividends paid by the investee and losses of the investee decrease the investment account. The investment account is not affected by changes in the investment's fair value under the equity method.

An unrealized holding gain on a company's available-for-sale securities should be reflected in the current financial statements as

other comprehensive income and included in the equity section of the balance sheet.

The unrealized gains and losses on available-for-sale securities are:

reported on the portfolio of investments. -The fair value method is applied to the portfolio of investments.