ACCT 405 - Chapter 12
Margot Company purchases $100,000 face amount, 6% semi-annual bonds for $110,000 when the market interest rate is 5%. Margot should recognize the following interest revenue for the first 6-month period
2750 (110,000*5%/2)
HTM Investment Reported in the BS at
Amortized Cost
Available-for-Sale Securities on Cash Flow Stmt
Classified as investing activies
Control Influence reporting method
Consolidation
An investment in trading debt securities is initially recorded at
Cost
James Company is paid $6,000 in dividends from Mark Corp. on its equity investment. James lacks significant influence over Mark Corp. James Company should
Credit dividend revenue
Trading securities typically are classified in the balance sheet as
Current Assets
Other comprehensive income (AFS debt securities)
Current period holding gains or losses
For each year presented, investors should disclose the following in the disclosure notes related to investments
Description of the valuation techniques used in the fair value measurement process Gross realized and unrealized holding gains and losses Aggregate fair value
Significant Influence reporting method
Equity Method
At the end of the accounting period, trading debt securities must be adjusted to what value?
Fair Value
Fair Value Option
allowed for HTM, AFS, and Equity Method and is made for each individual security and is IRREVOCABLE
Porter Company classified its debt investment in Bailey Company as an available-for-sale security. Subsequent to the purchase, the fair value of the investment increased by $5,000. The result of this increase in value will be
an increase in other comprehensive income
Consistent with the equity method, investment income is
based on investee's income times ownership percentage
Trading Securities
investments in debt securities acquired for the purpose of selling them in the near future -Written up or down to FV on BS
Accumulated OCI (AFS debt securities)
Net fair value adjustments to date - net holding gains and losses to date
Equity method on BS
-Recorded at Cost -CV increased - Investors share of investees NI -CV decreased - Dividends Paid
Available-for-sale Investment Reported in the BS at
Fair Value
Trading/FVTNI Investment Reported in the BS at
Fair Value
Porter Company classified its investment in the bonds of Bailey Company as a trading security. Subsequent to the investment, the fair value of the investment increased by $5,000. The result of this increase in value will
be an increase in net income
Consolidation Method
combine the seperate financial statements of the partent and the subsidiary each period into a single aggregate set of financial stmts
Northern Company has bonds with an amortized cost of $600,000. At the end of the first reporting period, the bonds had a fair value of $675,000. 2 days after the end of the first reporting period, the bonds have a fair value of $680,000 and Northern decides to sell the bonds. The initial investment in the bonds was $700,000 and the discount on bond account has a $100,000 balance. Northern properly classifies these bonds as trading securities. The journal entry to record the sale of the bonds includes
debit to cash $680,000 credit to investment in bonds $700,000 credit to fair value adjustment $80,000. debit to discount on bond investment $100,000
Action Company sells bond investments classified as trading securities for $99,000. The face amount is $100,000; unamortized discount is $2,000. What must be included in the journal entry to record the sale?
debit to cash $99,000, debit to discount $2,000, credit investment in bonds $100,000, credit to fair value adjustment $1,000
Main difference between consolidation and equity methods
level of detail (equity = one line consolidation)
HTM Treatment of Unrealized Holding Gains and Losses
Not Recognized
Equity Securities
Purchasing stock, part ownership relationship (common or preferred stock) No Influence (<20%) - FVTNI treat as debt Significant Influence (20-50%) Controlling Interest (>50%)
How are available-for-sale debt securities reported
Realized gains and losses are reported in net income in the period the investment is sold and unrealized gains and losses are reported as part of other comprehensive income when they occur
Net Income (AFS debt securities)
Realized gains and losses from the sale of AFS securities
Held-to-maturity securities
-Debt securities that the investor has the intent and ability to hold to their maturity date -Not adjusted to FV -Carried on BS as amortized cost
Equity method when cost exceeds the BV
-Goodwill is not amortized -tangible/intangible assets that are depreciable - Invest. income reduced by additional exp
Otto Company purchases $200,000 face amount, 8% semi-annual bonds when the market rate is 7%. The rate used to determine interest revenue for the first 6 months on the investment is
3.5% (the rate is divided by 2)
Transfer from HTM to AFS
No current income effect. Report total unrealized gain/loss as separate component of SHE (in AOCI)
Northern Company has bonds with an amortized cost of $600,000 and a fair value of $675,000. Northern properly classifies these bonds as trading securities. At the end of the reporting period
Northern will report an unrealized holding gain in net income and Northern will make a fair value adjustment of $75,000
Does IFRS allow for the FV option
Not allowed for most investments that qualify for equity method
Available-for-Sale Securities
Not for active trading and not to be held at maturity -Written up and down to FV on BS -Unrealized gains and losses that result from change in FV are NOT included in net income -> OCI
Adrianna Company purchases 35% of Saddle Company's outstanding stock for $450,000. During the first year, Saddle Company reports income of $200,000 and declares dividends of $100,000. Adrianna Company should recognize income earned by crediting
investment revenue for $70,000
When equity investments that lack significant influence are sold and a fair value adjustment account has been used to increase or decrease the carrying value of the investment, the investment account is credited for the
original cost of the investment
HTM Impairment of Debt Investments
recognize bad debt the same way they recognize it for any note receivable Dr bad debt exp Cr allowance acct
Holding gains and losses associated with investments properly classified as "trading securities" are
recognized as part of income
Available-for-Sale Securities on BS
reported at FV
Which of the following may be a valid concern that supports recognizing unrealized gains and losses associated with AFS debt securities in other comprehensive income?
Net income may otherwise appear more volatile than it actually is
FVTNI Securities (Fair value through net income)
investments in equity securities that lack significant influence -Written up or down to FV on BS
Investment is acquired in Mid-Year
journal entries modified to include appropriate fraction of each of the amounts recorded
Markus Company sells 1,000 bonds of its debt investment in Berta Inc. for $20,000. The original cost of the 1,000 bonds was $18,000. During the prior year, the bonds were reported on the balance sheet at a fair value of $19,000. Assume the investment was accounted for as available-for-sale and all unrealized holding gains and losses have been reversed. The journal entry to record the sale of the bonds should include these credits
Investment in AFS - $18,000, Gain on sale of investment - $2,000
Adjustments must be made to _____ to account for the tax effects of debt investments.
OCI and AOCI
Cash flows from buying and selling debt securities classified as trading as a part of normal operations typically are classified as what type of activities in the statement of cash flows?
Operating
Debt Securities
Purchasing a bond, creditor relationship for this company, no influence HTM (LT), Trading (ST), Available for Sale (inbetween)
Dividends cause the investor's investment in the investee's net assets to
Decrease
Transfer from either HTM or AFS to Trading
Include in current net income the total unrealized gain/loss, as if it all occurred in current period
Cash flows from buying and selling AFS debt securities are typically shown on the Statement of Cash Flows in what activities section?
Investing
Under fair value option
Investment carried at FV Unrealized gains/losses are included in NI For Equity method - investment still classified on BS but the portion of the FV must be clear
Trading from AFS to HTM
No current income effect. Don't write off any existing unrealized gain/loss in AOCI but amortize it to NI over remaining life (FV amt becomes cost basis)
Transfering between reporting categories
Transferred at its fair value on the date of transfer, not a common occurrence
Transfer from Trading to either HTM or AFS
Treat as trading classification, any gains and losses must be recorded (unrealized was already included in NI in those periods)
True or false: An investment in trading debt securities should initially be recorded at cost
True
Which of the following are categories available for classifying investments in debt securities consistent with IFRS No. 9?
fair value through OCI amortized cost fair value through profit or loss
AFS Impairment
if plan to sell before FV recovers - recognize in NI an amount of impairment loss = diff between amortized cost and FV If think FV will recover first - credit loss will be recognized in NI and non credit loss will be recognized in OCI
Characteristics that support classification of investments as trading securities include
motivation to realize short-term profits and frequent and active trading
Which of the following are possible categories for the purpose of classifying investments in the stock of another company?
no significant influence or control control significant influence
Equity Method on I/S
recognizes investment income as = to investors % share of the net income earned by the investee (dividends are not viewed as income)
Trading/ FVTNI on Financial Stmts
-Income Stmt and Stmt of Comprehensive Income - No effect -Balance Sheet - Reported at FV, current asset for trading securities, current/noncurrent for FVTNI - Cash Flow Stmt - cash flows classified as operating or trading (Investing only if not held for sale in LT)
Trading/ FVTNI Securities adjustments...
-are made to fair value adjustment account (contra account) -Unrealized gains or losses are reported as part of NI
Significant Influence
20-50% of voting stock, significant influence over operating and financial policies, vote for board of directors
Emil Company purchases $400,000 face amount, 6% semi-annual bonds when the market rate is 8%. The rate used to determine interest received for the first 6 months on the investment is
3%
How is an equity investment that lacks significant influence adjusted to fair value at the end of each reporting period?
A valuation allowance account is increased or decreased
Identify the statement that is correct regarding the purpose of additional adjustments under the equity method.
Adjustments help to approximate the effects of consolidation
Trading/ FVTNI Treatment of Unrealized Holding Gains and Losses
Recognized in NI and therefore in retained earnings as part of SHE
Available-for-sale Treatment of Unrealized Holding Gains and Losses
Recognized in OCI and therefor in AOCI in SHE
Parker Company owns 30% of Sandra Company's stock. Which of the following will increase the investment account?
Sandra Company reports income
Equity Method
Significant Influence - DO NOT adjust investment to its fair value
Changing from Another Method to the Equity Method
should change to equity method when having significant influence, previous method discontinued and the balance in the investment acct at date of change is used as starting balance (disclosure not required)
Motivation for companies to invest in securities
to earn a return on temporarily idle cash or secure a certain operating/financing arrangement with another company
Available-for-Sale Securities on I/S and Stmt of Comprehensive Income
unrealized gains and losses are shown in OCI (reclassified out of OCI when sold)
Changing from equity method to another method
when level of influence changes, may change method ex: loss of significant influence - CV at date of transfer becomes cost basis under new method
